clock menu more-arrow no yes mobile

Filed under:

Making it cheaper and easier to trade stocks is a terrible idea

Sometimes you read about a startup idea that sounds too ridiculous to possibly be a business. Other times you read about a startup idea that's chillingly plausible. Robin Hood which wants to offer zero-commission smartphone-based stock trading, falls into the latter category: it makes perfect sense as a business, but it will be a disaster for customers if they use it.

The deal with commissions is this. Traditional stock brokers exacted hefty transaction fees from consumers every time they made a trade. Then online brokerages like E-Trade entered the scene with a disruptive business model that offered drastically lower fees. Robin Hood is aiming to take the process the next logical step forward — zero consumer-facing fees will let it sign up a massive user base and generate revenues through other means. What exactly those means will be is a bit uncertain at this point, but where there's a massive user base, there's a way.

Unfortunately, this is a product that nobody should use.


That's because the problem with buying and selling shares of stock has very little to do with brokerage fees. The problem is that you are not very good at picking which stocks to buy and sell. You do not have the level of investment skill necessary to beat the accumulated research departments and trading algorithms of all the time investment banks and hedge funds. And if you did have that level of skill, you wouldn't be trading from your smartphone — you'd be plying your trade as a full-time job. But human beings have a tendency toward overconfidence and overtrading and those overconfident overtraders are the market for this app.

Just remember that on average the stock market is more likely than not to go up, so if you manage to save for the long run by buying a diverse portfolio of stocks you'll come out ahead. But trying to pick stocks and trade rapidly is a bad idea, so a new platform that makes it cheaper and easier to do is by no means good news.

Sign up for the newsletter Today, Explained

Understand the world with a daily explainer plus the most compelling stories of the day.