NEW YORK (TheStreet) -- As investors, we are always looking for the best broker to fit both our trading style and our wallets. Traditionally, young and small investors have had difficulty breaking into the investing world as a result of high transaction costs. Over the last few decades, as transaction costs have plummeted with the advent of technology, $10 a trade is arguably high for those trading low levels of capital.
As a college student, many of my friends are always asking how they can get involved in the markets. Many simply want to buy a few shares of their favorite brands or want to start saving. Unfortunately, many are deterred when I explain the standard commissions within the business. For those investing only a few hundred dollars at a time, fees make profitability significantly harder and expensive -- in terms of account value.
Typically, I lead these investors towards commission-free offerings such as exchange-traded funds offered by the array of brokerage companies, including E*Trade, TD Ameritrade, and Fidelity. However, this weekend I discovered an interesting new concept, and a company, looking to remove these hurdles for small and young investors.
The company, Robinhood, is a new startup brokerage with some strong equity backing. Based in Palo Alto, Calif., the company has attracted a number of prominent investors including Google Ventures, Social Leverage, and Andreessen Horowitz, to name just a few.
Founded by Vladimir Tenev and Baiju Bhatt, a couple of high-frequency trading engineers, they aim to bring a more efficient brokerage to a greater number of people. Based in technology, the company seeks to run a leaner version of the brokerage firms we know today. Robinhood will offer its users free trades, free market data, and require no minimum deposit -- all with standard SIPC insurance. Honestly, I could not imagine a better product for college students, like myself, looking to get started in the markets.
By avoiding transaction fees, the average small or young investor could afford to put $100 a month into their favorite brand or company -- which would fit perfectly for parents looking to get their young adults into the investing game. Users will place orders into the Robinhood application to buy and sell stocks, then the company will execute orders at the best available price across all stock exchanges. Over 5,000 tradable securities will initially be offered, which I am sure will cover most stocks this group of investors are looking to buy.
According to the company's website, the application will only be available on the web and on iOS platforms. Robinhood seems to be focusing on mobility, something which should be second nature to the audience they seem to be targeting. Margin trading will not initially be offered, although it doesn't really seem necessary for most small investors.
We always hear how financially illiterate the younger generation is, well here is a tool to help curb the problem. There's a waiting list for joining, but I haven't actually been able to test the functionality of the brokerage as they told me that there is currently 11,342 people ahead of me. I am in no way affiliated with the company, I just wanted to share this interesting and undercovered concept with my readers -- and which can help many get started in the markets. And I will most certainly be sharing Robinhood with all those who have asked me how to get started in the markets.
Oh, and are you worrying about the catch? Well, it seems the company will take user orders and provide liquidity to other firms, therefore Robinhood will receive separate compensation for the transaction. I'm guessing Robinhood probably takes in a cent or two, per transaction for their efforts. By removing the overhead costs of a traditional brokerage, the company can afford to operate at low margins. Hopefully everything works out for these guys, I know their technology could help many young investors out there.
As for the larger brokerages, I would expect them to be watching Robinhood closely. If customers do seem to respond well to the model, I feel they would have to remain competitive and offer some sort of similar product to their young and small customers. What happened when online trading was launched, the cost of trading dropped significantly and every brokerage firm was forced to follow suit. It is possible the same phenomenon could happen yet again, who knows.
At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.