You can’t really go to the New York Stock Exchange and say: “Hey, I want to buy 500 bucks worth of Apple stock”. To buy or sell stocks you need brokers (ideally discount brokers). Brokers are basically companies that have the capability of executing the trades for you. A “middle man” if you will. Similar to buying or selling a house. You usually go through Real Estate Brokers/Real Estate agents to execute that task.
When I started investing in stocks, there were very few brokerage options were available. And they were all extremely expensive! I remember I paid over $15 per each trade on my first Fidelity personal brokerage account about 10 years ago. When my dad invested in stocks 35 years ago, he told me fees were even MORE expensive!
Paying $15 every time you buy or sell stocks doesn’t seem as much but it quickly adds up. And if you were constantly trading, then those brokerage commissions became a nightmare. For example, if I bought and sold stocks just once per week, I had to pay $30 for those two transactions. This meant I would end up paying over $1,500 bucks a year to Fidelity! ($30 per week x 52 weeks in a year = $1,560.) Even if your trading frequency was much lower, you can see how these commissions eat your returns.
The Rise of the “Discount Brokers”
Well lucky for me, and you, times have changed! We are now in a new, inexpensive era. These days certain brokers will execute your trades for free! The companies that do this are commonly referred to as “discount” brokers. The discount broker movement started with a brokerage firm named Robinhood in 2014. Although Robinhood started to really gain momentum in 2017. Over the last few years, it has become a recognized brand in the industry, and actually “disrupted” it.
The idea of the “commission-free” trade took the industry by storm. It was truly revolutionary. Several of the other most “established” broker firms were forced to “follow suit”. They had to lower their commissions to compete for customers. Additionally, it has spurred the creation of many other “discount broker” platforms.
These other discount brokers compete directly with Robinhood. In my opinion, many of these newer platforms beat Robinhood by a large margin. Just because Robinhood was “the first” discount broker, doesn’t necessarily mean it is “the best” discount broker. Don’t get me wrong, I think Robinhood is “okay”. But, I currently believe there are much better options as I will explain in the breakdown below.
My goal is to compare and contrast three of the most popular discount brokers on the market right now (including Robinhood). This will help you make a better decision on which broker is the right “fit” for you. Although the discount brokers are very similar conceptually, there are some stark differences. Each discount broker has its “pros” and “cons” if you will.
The good news is that all the discount brokers have some extra benefits aside from executing your trades for free! For example, some of them will give free stocks if you sign up for their platform. That’s right, you will get stocks Completely FREE! That is a pretty nice perk if you ask me.
Other discount brokers offer fractional shares. This is great because it enables you to purchase a “piece of a stock” not the entire stock. Why would you want to do that? Well, certain stocks are very expensive. For example, Google stock currently costs around $1,500. This means it is out of the reach for many small investors beginning their journey. So these discount brokers will give you the possibility of buying a “fraction” of the stock. Therefore, you can gain exposure to Google without having to invest the price of a full stock.
Capabilities of all three Discount Brokers:
- You can buy stocks and ETFs with all of them.
- They all offer “commission-free” trades.
- All of the platforms are extremely easy to use and fully digital. You can set up your account in minutes.
- Low balance needed to open an account (either $0 or $100).
So without further ado, let’s jump straight to it!
Robinhood
Robinhood is the pioneer in the “discount brokers” field. The company was founded by two Stanford students. The classic college room Tech startup story. As of December 2019, it has more than 10 million accounts.
Robinhood is designed for complete beginners. If you’re completely starting your investing journey Robinhood might be a good alternative. But the consensus in the industry is that the platform lacks a lot of capabilities. In other words, it is a little “too watered” down, a little too “basic” if you will.
With Robinhood, you can buy Stocks, ETFs, Options, and Cryptocurrencies such as Bitcoin. You can also buy fractional shares! Meaning you can buy a fragment of a stock, not the entire stock. This is a great benefit since many popular stocks such as Tesla and Google cost more than $1,000 per stock.
Robinhood is regulated by the Security and Exchanges Commission (SEC). Robinhood is also regulated by the Financial Industry Regulation Authority (FINRA). Additionally, your investments are protected by the Securities Investor Protection Corporation (SIPC). Translation: Despite their name, Robinhood is not going to steal your money. They are a legitimate institution.
However, in December 2019, FINRA fined Robinhood $1.25 million. FINRA stated Robinhood “failed to direct trades so that its customers received the best prices”. FINRA also said “Robinhood” failed to satisfy its best execution obligations”. This is a little shady if you ask me, and this is just the tip of the iceberg.
Robinhood drawbacks vs Webull & M1 Finance:
- Robinhood’s platform is not as stable/reliable as the other platforms. In 2020, the platform has “collapsed” on at least three separate occasions. These outages have let Robinhood’s users unable to buy or sell stocks for full trading sessions. To make matters worse, the outages occurred at the climax of the Coronavirus sell off! Meaning some people desperately wanted to buy or sell stocks due to the high volatility. But their trading platform left them sitting on the sidelines. (More recently, another outage occurred on 8/31/2020 when Apple & Tesla stock splits were executed.)
- Robinhood doesn’t offer the capability to short stocks. More on this on the Webull Section.
- Robinhood doesn’t offer tax-sheltered accounts such as IRA retirement accounts. They only offer personal brokerage accounts.
- Robinhood doesn’t have any Robo-advisor features. More on this on the M1 section.
- Robinhood considerably lacks research capabilities. The platform doesn’t provide you with relevant information related to the companies you’re buying stock from. In a sense, you’re “flying blind” with Robinhood.
- Their customer services aren’t as robust. Users report difficulties contacting customer service and getting support. This is a very concerning matter. Especially because Robinhood is more prone to reliability issues than other platforms.
- Robinhood doesn’t offer a “paper” trading account. More on this on Webull section.
- Robinhood is not transparent on exactly how they make money.
Robinhood FREE Stocks:
Although Robinhood offers one free stock valued between $2.50 to $200, Webull is far more generous. Read Webull’s Free Stock section below.
Robinhood Conclusion:
Think of Robinhood as an old, “bare bones”, Honda Civic. It is a good car to learn how to drive when you’re 16. It will take you from point A to point B. However, the majority of people will want to upgrade sooner rather than later. Especially, if you can get a newer, better car for the same money. Remember all these brokers are Free!
If you’re a complete beginner it is a good option, but I wouldn’t get “married” with this platform if I were you.
Webull
Webull is my favorite discount broker for ACTIVE traders.They are an “all-in-one” investment platform. A “one-stop-shop” if you will. The company is a United States-based Fintech startup offering zero-fee brokerage services. Webull was founded in 2017.
Like Robinhood, the platform offers only US-based stocks, ETFs, and options.
Webull is also regulated by the same top-tier financial authorities as Robinhood. Mainly the SEC & FINRA. Additionally, your investments are protected and insured by the (SIPC). Webull hasn’t experienced any of the issues Robinhood has. Translation Webull is legitimate and safe. It also seems to be better in this regard than Robinhood
Some advantages Webull has over Robinhood:
- Webull offers tax-sheltered accounts. Such as retirement IRA accounts.
- Webull offers the possibility of short selling stocks. In simple terms, shorting a stock means making a negative bet against a stock. If the stock price decreases you make money. If the stock price increases then you lose money.
- Let’s illustrate this with an example:
- Let’s say you short Tesla at $1,000 because you think the price will drop. Let’s say Tesla stock does go down to $800. Therefore, you decide to end your short. You will pocket that $200 difference! It is literally the opposite of buying stocks.
- Webull offers way better tools and analytics. You may not use them, however, it is nice to have them available. These tools will give you important information such as:
- Cash Flow Reports
- Balance Sheets
- Income Statements
- Morningstar Reports
- Real-Time data Graphs
- Background Research
- Upcoming IPOs
- Which companies have upcoming Dividend payments
- Which companies are reporting earnings soon
- Their “free stock” sign up bonus is more generous than Robinhood (see below).
- Webull offers “paper” trading accounts. Paper trading is basically a “simulation” account. It has all the functionality of a real trading account but doesn’t use real money. So, you can try strategies to see if they work without getting burned. I recommend using the paper trade option to warm yourself up before doing real trading with real money. Think of it as training, the same way athletes practice and drill moves before game time.
Webull FREE Stocks:
If you sign up to Webull by clicking THIS LINK, and deposit $100 or more into your account, you will get a FREE stock! The FREE stock’s prince range will be between $8 and $1,600.
Like Robinhood, the stock is randomly chosen between that price range. However, Robinhood’s free stock will be valued between $2.50 and $200. Webull’s price range is between $8 and $1,600! A much more generous proposition.
Please keep in mind that to get Webull’s free stock you need to deposit at least $100 into your account. The funds need to be deposited within 30 days from account opening. But, this is a no brainer! After all, you need to fund your account so you can buy stocks through the platform.
Webull Conclusion:
Think of Webull as a powerful brand new sportscar, with all the “bells & whistles”. Like a Corvette or a BMW M3. It has all the capabilities you need. It might not be as easy to drive at first, but you won’t “outgrow” the car anytime soon. This is the car you want if you’re a car enthusiast and plan to take it to the track on the weekends. Click HERE to visit Webull!
M1 Finance
M1 is my favorite discount broker for PASSIVE investors. It is another great brokerage platform that offers commission-free stock trading. One of its main perks compared to the other platforms is that it offers a new age “Robo-advisor” service.
Robo-advisors provide automated, algorithm-driven financial planning services with little to no human supervision. This service gives investors the possibility of investing in dozens of expert-built portfolios. With no asset management fees, so this perk is completely free of charge!
There are portfolios for any type of investor. From ultra-conservative, to moderate, to ultra-aggressive. So, passive investors can easily put their money into one of the portfolios and watch it grow. This platform automates the entire process. Some of these portfolios even mimic the strategies and allocations of famous Hedge Fund managers such as Carl Icahn.
M1 is not alone in the Robo-advisor space. It has competitors like Wealthfront or Betterment. But all the other Robo-advisors charge asset management fees!
If you want, you can also build your own portfolio from scratch. You don’t have to put your money in the Robo-advisor portfolios! One of my favorite things from M1 is that you can invest in multiple portfolios. You can split your money between the portfolios and see which one performs best.
The platform is very intuitive and user friendly. It presents all the investment portfolios as a “pie graph”. Think of a pizza, with each slice being a specific asset. So you can easily see how your money is distributed.
M1 Finance is designed for long term investing, so it is not a great platform for an active trader! This is because there is only one trading window per day. Meaning, you can’t execute trades throughout the day on M1. (This is similar to how mutual funds work on any brokerage platform. You can only buy or sell mutual funds once per day.)
Another great perk of M1 is that you can choose to automatically reinvest any dividends your stocks make. Dividends are cash payments certain companies pay their stockholders. When that cash is reinvested and used to buy more shares of the company this is known as a “DRIP” (Dividend Re-Investment Plan). This means your money passively compounds! Your stock ownership grows dividend payment after dividend payment!
M1 offers retirement accounts, as well as fractional shares. In fact, dividend payments are usually re-invested through fractional shares.
M1 Finance Conclusion:
Think of M1 Finance as a brand new Tesla with self-driving capabilities. This is the car you want for a long, pleasant, road trip across the country. Just sit back and relax. The car can navigate you where you need to go, and you won’t have to stress out figuring out how to get there.
Click HERE to visit M1 Finance!
My ACTIONABLE Discount Broker Tips:
Nobody gets rich by sitting on the sidelines. Pick Webull and/or M1 Finance and start investing now!
I highly suggest you read my articles on “Stock Investing v.s. Stock Trading” and “Investing in Index Funds“!
Conclusion for Discount Brokers in 2020:
- If you’re an active trader or plan on doing relatively frequent buying and selling, choose Webull.
- If you’re a passive investor and plan on letting your money compound for longer timeframes chose M1.
- Some people might like Robinhood’s crypto offerings. But if you want to trade Cryptocurrencies such as Bitcoin choose Coinbase! That is the best broker for that specific niche. You can find my article on making money with Bitcoin, Forex, and Gold here!
There is no reason whatsoever to remain on Robinhood!
If you think stocks aren’t your thing, then check out my articles on Real Estate Investing and/or Money Lending Investment Strategies (like Bonds, CDs, and Peer-2-peer lending).
Disclaimer: the capabilities and features of these brokers are constantly changing. This is a very dynamic industry were perks might increase or decrease at any moment. For example, the “Free Stock” terms might change at any given moment. This article reflects the latest and greatest information I had when I wrote it.