How Are Websites Able to Offer Free Stock Trading?

Brokers, Investing
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The stock market’s gradual recovery has encouraged many newcomers to try their hand at investing. A good portion of these first-time traders are young millennials who are unwilling to pay the commission fees charged by some of the larger, more well-known brokerage firms.

Websites like Loyal3 and Robinhood, which provide free stock trading, are capitalizing on this growing market. Since they don’t charge commission fees, customers may be left wondering how they make money.

The role of corporate partnerships

In lieu of making money off fees and commissions, Loyal3 has secured a number of corporate partnerships that use the website for direct-purchase to individual investors.

According to Loyal3’s website, “companies… pay or have paid fees to Loyal3 in exchange for services for certain offerings.” This essentially means that the type and number of stocks that people can trade will be limited, especially when compared to many of the more established brokerage firms. That said, these partnerships make financial sense for Loyal3, since the corporate partners cover the transaction fees that Loyal3 or the customers would otherwise have to pay. The partners also compensate Loyal3 for every investor that signs up through its website. Check out our Loyal3 review to learn more.

Robinhood, another website that doesn’t charge any fees, explains that it will offer margin trading, which involves borrowing money from a broker to purchase stocks. The website also makes it clear that it plans to implement a system in which it will be paid to provide “trade volume in certain markets” and that it will eventually roll out a premium service that will presumably carry a small fee. Both features will help the website make money. Check out our Robinhood review to learn more.

A helping hand from venture capital firms

According to an article on Forbes.com, Robinhood has raised $3 million through prominent venture capital firms like Google Ventures and Andreessen Horowitz. These funds have presumably helped Robinhood cover overhead costs as it continues to expand its business and find new ways to become independently profitable.

It also helps that these free stock trading websites don’t spend much money to stay afloat.

Minimal overhead costs

Free stock trading websites’ low overhead costs help keep them above water. Websites like Loyal3 and Robinhood are technology-driven, meaning they don’t have to spend much money on purchasing office spaces or hiring analysts.

The downside to not having any analysts is that new traders are completely on their own when it comes to making trading decisions. Budding traders looking for personalized advice and in-depth analysis will have to look elsewhere. What’s more, Loyal3 uses batch trading, which most advanced investors steer clear of because orders aren’t carried out on the spot. Moreover, neither of these websites offers mutual funds.

Undeniable popularity

Despite the lack of expert advice on these platforms as well as their other drawbacks, Robinhood currently has a waitlist of 434,313 people that are eager to use the website’s free services. According to CNN, that figure hovered around 340,000 only three months ago, suggesting that Robinhood’s popularity has yet to plateau.

The fact that so many people are willing to get in line to trade stocks on Robinhood bodes well for the future of these free stock trading platforms, and might make them worth checking out for anyone interested in cheap, hassle-free trading.

Learn more about free trading >


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