Robinhood Revives Old Dream of Free Online Stock Trading

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It's alive! (Or rather, it's "live.")

Ever since its video appeared on vimeo.com about a year ago, individual investors have been hearing about a new stock trading service called "Robinhood" that promises fee-free investing. And now it's here.

Introducing Robinhood

Aimed at on-the-go investors, Robinhood promises to permit commission-free trading to individual investors using their iPhones, iPads and iPod Touches. (The company says versions of its software for Android devices and for Web use are in the works.)

Now, fee-free stock trading isn't exactly a new idea on the Internet. Back during the dot-com heyday, sites like Freetrade.com and Zecco.com that promised free or nearly free stock trading were a dime a dozen. But the realities of the market -- such as that if you want your company to remain solvent and independent, it has to get money from somewhere -- led to these ventures either disappearing or getting bought out by savvier businessmen.

More recently, we've seen limited forays into free trading by the likes of Loyal3, which offers free online trading and adds the twist of allowing you to buy fractional shares. But Loyal3 only lets you buy 64 available stocks -- Intel (INTC) but not AMD (AMD), Kellogg (K) but not General Mills (GIS), Dunkin' Brands (DNKN) but not Domino's Pizza (DPZ).

Robinhood is different, promising to enable purchases of more than 5,000 different "U.S. equities and exchange trade[d] funds (ETFs) listed on major U.S. exchanges" such as the NYSE and Nasdaq. What's more, the service, which is currently in version 3.0.3, is still being upgraded, and Robinhood says it is "working on" adding "foreign domiciled securities, OTC securities, options, warrants, or mutual funds" to its offerings.

Three Taps, Zero Dollars

So how does it work? Well, first, you need to either receive an invitation from someone who's already using Robinhood, or apply for a spot on the waiting list for your own invitation. (It took me about three months to go from waiting list to invite, if that's any help.) But once that invitation arrives, the process is pretty straightforward: Fill out a few forms online, link a bank account to Robinhood and transfer some money to fund your account, download the mobile app to use the service, then log into it and set up a PIN.

At that point, you're ready to trade. Robinhood initially presents you with a short list of its "most popular stocks... based on the trading activity of Robinhood customers." (In case you're interested, Robinhood investors have a particular affinity for Apple (AAPL) and Starbucks (SBUX) -- of course -- but also for Disney (DIS), and ... Kroger (KR), of all companies!

But by tapping the search icon, you can search through the service's vaunted 5,000 offerings for anything else that appeals to you. Once you find one, Robinhood says it "couldn't be easier" to make a trade: "Three taps... I just bought some stock. Zero commission."

At present, the system is pretty bare-bones -- which isn't necessarily a bad thing for new investors, who should probably keep things simple to start. Press the "buy" button and you won't accidentally buy a stock that you were just hoping to window-shop. Rather, this button opens an order form where you can see the current price of the stock. If you like the price, you can enter a "market order" to buy it. If you don't like the price, you can switch to a "limit order," and enter the price you would prefer to pay.

If the stock reaches your desired price before the trading day ends, Robinhood will buy it for you. If not, the order will be canceled -- with no fee charged to you in either case.

How Do They Do That?

Robinhood says they can offer fee-free stock trading by:
  • First, earning interest on any money you have in your account with Robinhood that's not presently invested in stocks (i.e., they take the interest. They don't pay you the interest).
  • And second: "cutting out the fat -- hundreds of storefront locations, manual account management, expensive Super Bowl ads, etc." that more traditional online brokers pay for.
Robinhood is also looking into other ways to fund its operations, such as by offering margin accounts to enable its customers to short-sell stocks, and collecting interest on those. Whether this will be enough to enable Robinhood to survive and thrive where so many "free stock trading" services have failed remains to be seen.

But so far, so good.

A dedicated PC guy, Motley Fool contributor Rich Smith had to borrow his daughter's iPad to try out Robinhood. He's looking forward to the day they roll out software for running Robinhood off a "real" computer.

The Motley Fool recommends Apple, Intel, Starbucks and Walt Disney. The Motley Fool owns shares of Apple, Starbucks and Walt Disney. Try any of our Foolish newsletter services free for 30 days. Want more free things? Check out our free report on one great stock to buy for 2015 and beyond.​
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