It’s the story of the little guys against the Wall Street giant. Back in the day, the story would’ve had a clear winner...
So how, instead, have the little guys of Reddit crushed Wall Street these past few weeks?
You see, to the world, they’re the little guys, but through the help of fintech trading apps, they’re a growing breed of micro-investors largely consisting of millennials who have realized their collective power.
Since the rise of trading apps, the investing playing field has been evening out.
That’s why in this post, we’re going to focus on filling you in on how these fintech trading apps have revolutionized investing.
Free trading apps have helped democratize the stock market— in other words, it’s made investing accessible to all.
Free trading apps attract younger crowds by having no account minimums, zero trade fees, and offering maintenance fees starting as low as $1 per month. Young investors with limited money could now start investing and gaining investing experience, enabling them to have more control over their financial life.
Back in the day, investing had a few barriers to entry for those who didn’t have a lot of spare cash around. Financial barriers came in the form of brokerages requiring high account minimums, charging a fee per trade, and charging maintenance fees.
Already at an advantage, the wealthy and professional investors also were able to leverage more sophisticated technology, lower fees per trade, and exclusive research teams.
The world of investing was an intimidating world for most millennials. And this is when a few fintech founders got an idea. One of the first fintech to lead the way was Robinhood, which made the concept of zero commission popular.
Now that the biggest barrier to entry was essentially removed, it drew many millennials and younger people into the world of investing. Ever since the introduction of fintech, brokerages have been forced to change their ways to stay competitive and this has caused many of them to also eliminate their trading fees.
Another breakthrough came in the form of fractional shares. Now that more young people joined the market, they were starting to want in on these big companies who had pricey shares.
Back in the day, people would have to save a lot of money to get in the action, but not anymore, with many trading platforms offering a concept called fractional shares. This allows you to buy part of one stock for as low as $1. This was a game-changer.
One advantage of free trading apps over banks is their digital nature, saving them on overhead costs associated with traditional banks and brick and mortar businesses. They often pass the savings to their customers in the form of lower or no fees.
Another advantage is the use of sophisticated technologies led by AI. One example is robo-advisors as an alternative to financial advisors. Robo-advisors analyze large sets of data and spot patterns using complex algorithms to give you top-notch unbiased investment assistance. They offer an easy way to build an investment portfolio using a straightforward process— you just have to choose a goal, timeline, and risk level and the robo-advisor will create a portfolio you can trust.
On the other hand, banks often have in-house financial advisors that generally make commissions off what they sell you. Though some financial planners are honest, there is still an undeniable conflict of interest here that has made many hesitant to use one. Even if we can know for sure when their motives are honest, you still have to pay extra to cover their commissions. Robo-advisors, on the other hand, are technology and don’t need to be paid.
Financial advisors also generally charge a certain percentage of every dollar they manage for you, even when you lose money, they still get paid. This area has been notorious for hidden fees cleverly placed in the small print, which is often filled with jargon that not many people understand.
Free trading apps also allow you to leverage automatic rebalancing, algorithmic trading, and other features that were once exclusive to only people with huge amounts of capital.
If trades are free, how do free trading apps make money?
Free trading apps are able to keep healthy margins through a mix of a few things, including:
Low overhead because of digital nature: Because these companies often don’t have as much overhead, they can afford to dramatically lower fees while still making a profit.
This has been a controversial way of making money, however, many brokerages have been doing it for a long time. Essentially, they get paid by third parties as an incentive to send trade orders to them, sometimes affecting the trade rate the customer gets. This practice is allowed by the SEC as long as the companies tell the customers.
When you buy US stock from Canada, your Canadian dollars first have to be converted to U.S. dollars.
You can either do this before you buy the U.S. stock or in the same transaction. Some people choose to use their Canadian account to buy U.S. stocks, but the currency still has to be converted. This means you’re stuck using your brokerage of choice’s conversion fees. These can be costly, especially if done through a bank.
Another way to go about buying U.S. stock from Canada is to convert your Canadian dollars to U.S. dollars (CADUSD) first using a service with good forex rates. Then buy the U.S. stock in another transaction. When it comes to profit margins, hefty forex fees can drastically cut it down.
We’ve just announced our newly released Remitbee online currency exchange, which charges just .005% to .01% of CAD/USD or USD/CAD transfer while also offering high exchange rates.
To put things in perspective, banks change up to 3% in fees plus their exchange rate margin, which can add about an extra two percentages.
If you want to take advantage of competitive USD/CAD rates, here’s how to do it step by step:
Keep in mind it’ll take two business days to see the converted funds in your account.
Fintech has been challenging many aspects of traditional finance, so it’s no surprise it’s changing investments as we knew it. These innovations are forcing big banks and other traditional institutions to pay attention and make moves to start being more competitive. Lucky for you and me, this competition often drives down costs and makes them more mindful about the experience they provide.