Commission-Free Trading Apps: A Good Choice?

The cost of trading stock has dropped drastically with the rise of digital platforms. Large trading firms have started providing no-fee stock trading options to retail investors, and in doing so, they’ve transformed the stock market. These firms have included TD Ameritrade, Charles Schwab, ETrade, and, of particular note, Robinhood, which reported more than 4.3 million daily average trades in March of 2020, as cited by Quartz.

Interestingly, commission-free trading has been driven by large investment funds. These funds depend more and more on algorithms and instant electronic transactions, and they pay for early access to the brokerages' orders. Here’s how trading on the apps works: when individual investors trade, their purchased shares will often come from a type of intermediary referred to as a market maker, rather than directly from the stock exchange. The benefit to these intermediaries is that they might sell the shares at a higher price than they would get by selling in bulk to a large player. The benefit to individual investors is often purchasing the shares at lower prices, relative to more traditional routes.

Aside from the companies already mentioned, other trading apps have also gained users. Also, some of these apps offer cryptocurrency trading. For example, Plus500 was founded in Israel in 2008. In 2013, Plus500 became the first broker to allow Bitcoin CFD trading. Using Plus500, you can trade shares, CFDs, forex, commodity, and more.

Additionally, in a process referred to as leverage, you can borrow money from Plus500 to boost your positions. Competitor eToro has similar features while also offering a social news feed on which users can share developments. Keep in mind that although these apps are commission-free, they do have other fees associated with them, so be sure to do your homework and read the fine print carefully.

Pitfalls of Trading Apps

Robinhood was founded in 2013 and is no stranger to controversy. The company serves as a useful example of the pitfalls we watch out for. Although the law requires brokers to offer the best available prices, some regulators and lawsuits have suggested that this isn't always the case. As a result, in 2019, Robinhood paid a $1.25 million USD penalty, according to the Quartz article.

Furthermore, Robinhood offers options trading, which is a controversial practice in the retail investment space. What it does is it allows investors to buy or sell at predicted future prices. While brokers and market makers find retail options trades more profitable on the apps, options can become quite complicated and highly risky for individual investors. In fact, since the June 20, 2020 suicide of 20-year-old Robinhood user Alexander Kearns, Robinhood has improved its platform to address concerns. As cited by Quartz, Robinhood hired an options-education specialist, enhanced the educational material in its help documentation, clarified customer emails and messages about multi-leg options spreads, and expanded the history section of its app for greater transparency.

Since app developers purposely design the systems to encourage more trading, it's incredibly easy to get caught up in the thrill and turn down your rational side. Plus, if you try to time your buying and selling precisely, keep in mind that app outages and other technical glitches can interfere with even the best strategies.

As a general rule, Quartz recommends "a diversified portfolio of long-term investments across industries and asset classes," such as exchange-traded funds. Diversity allows you to choose your risk tolerance overall and not be swayed by one particular asset.

Consider diversifying your portfolio through the private placement market, perhaps with a Rule 506(c) offering. A Rule 506(c) offering is a special type of offering that allows the issuer to conduct general solicitation, as long as the issuer uses verified accredited investors only. If you have either the requisite income, net worth, or financial credentials, becoming an accredited investor is simple.