ROBINHOOD JUST LAUNCHED A $1 INVESTMENT

What's up guys! It's Graham here, and it's been about a month since I reported on this whole Robin Hood stock trading drama fiasco. Because for the most part, there really haven't been any updates worth sharing, and I began to believe that things were settling down. That was of course until I awoke early Thursday morning and noticed promptly at 7:00 a.m. that they just launched a brand new feature aimed at directly competing against their archrival and nemesis, Charles Schwab.

Not to mention, I predicted this would happen in one of my previous videos, and I will mention that shortly. But first, let me bring everyone up to speed who hasn't been following this drama lately. It's almost like we're watching a really odd quarrel between two lovers: Robin Hood and Charles Schwab. Which, let's be real, is still a better love story than Twilight. Wait, is that meme too old to use now? Did I just bring that back?

Anyway, now for some backstory. Robin Hood first launched on the scene in late 2013 with the premise of offering an easy-to-use mobile platform that you could trade stocks on with — wait for it — absolutely zero commissions. Until then, it was customary that pretty much every single stock brokerage out there would charge commissions ranging anywhere from $4.95 all the way up to ten dollars anytime you wanted to buy or sell a stock. Meaning, if you wanted to invest $100 in your favorite avocado stock, well, you would have to pay five dollars in commissions for the privilege of doing so. And then another five dollars for the privilege of selling it, hopefully for a profit.

So right there, automatically, 10% of your $100 investment is just wiped out and gone from fees. And then you’ll have to earn more on top of that just to draw a profit. So, in a way, Robin Hood was a major pioneer in creating $0 stock trades. And that also meant that people can invest smaller amounts of money without having to worry about trading commissions obliterating their returns. I gotta say, that did end up completely revolutionizing the way we now invest our money.

No, I have a feeling that when this happened at first, larger brick-and-mortar brokerages didn't take these zero dollar stock trading apps seriously. Well, that was until Robin Hood began gaining some serious traction, and until they started seeing Millennials booing and aahing at the fact that they could trade and buy or sell stocks for completely free. And that brings us to Robin Hood's big bad wolf, Charles Schwab.

They decided if they were going to be competing with Robin Hood, they could just go and copy everything Robin Hood was doing and then just do it better. And they did too! Let's go! Charles Schwab announced that they would be lowering their stock trading commissions from $4.95 all the way down to $0. And that shook up the entire industry. It seems like, for a few weeks, that was the biggest news in finance. Any time an industry giant as big as them makes a move like this, literally everyone else follows.

That also destroyed some of their competitors, like TD Ameritrade, whose stock dropped more than 25 percent in a single day because they too had to cut commissions just to remain competitive. Commissions made up about 36 percent of that company's revenue. At that point, it seemed like Robin Hood was almost destined for failure because, even though they were an easy-to-use stock trading app and had a lot of popularity, they still lacked quite a few features and they couldn't really compete on the level that Charles Schwab could.

But you gotta hand it to them because they fought back. They did so by unveiling the new cash management account, promising to deliver a 2.05 percent interest rate and FDIC insurance up to $1,250,000. That was a direct attack on Charles Schwab, who pays a pretty pathetic amount on their checking and savings accounts, which — if you go on their website — is a whopping 0.18 percent. And Robin Hood knew that they could attract a significant portion of its users back on the platform because those users want to get an interest rate that is slightly better than what everyone else is offering.

And I gotta hand it to them, that was a pretty good move. This is because Robin Hood knew that a big portion of Charles Schwab’s revenue — or, more specifically, $5.8 billion worth — comes from net interest revenue, which is the money they make every time you leave uninvested cash on their platform. So now it makes sense why Charles Schwab would even go for zero dollar trades in the first place. It meant that they could potentially get Robin Hood's customers to move over and put money on their platform.

Those customers could then leave some cash just sitting around on the sidelines between investments, and then Charles Schwab can rake in billions of dollars by sweeping your leftover money into other non-risky investments, paying you 0.18 percent in interest and then profiting whatever difference between what they pay you and what else they make on those investments. So, given that punch to Charles Schwab's ego, they couldn't just let it be, and they had to one-up Robin Hood yet again.

And they did it by allowing fractional shares. That meant that instead of needing the full amount of money to buy 100 percent of a single stock, you could invest as much and own a smaller portion of that same stock — all without a commission! Like, imagine going and walking into the pizza store and seeing two full pizzas, one cheese and one pepperoni, each on sale for $20, and then thinking to yourself, “I don't want to spend $40 on two full pizzas because I only have $10, and I don't want that much pizza!” Said no one ever.

So instead, you spent $5.00 on one slice of cheese pizza and $5 on one slice of pepperoni pizza without needing to come up with the full $40 to buy both pizzas in full. That’s exactly what it’s like to buy fractional shares. Except, instead of buying pizza, you’re buying stocks. Anyway, Charles Schwab doing this was a big game-changer for the entire industry because prior to them, no big brokerages were out there doing this. Not to mention they can also directly compete with other companies that promoted fractional investing, like M1 Finance, Stash, Betterment, and even Acorns.

With that, Robin Hood appeared to lose a lot of the competitive advantage they once had. That was until this morning. Robin Hood has just announced that they will finally be introducing fractional shares — which, by the way, I predicted they would do in a video posted about a month and a half ago. Here's that video! Because I believe there’s also nothing stopping Robin Hood from going back and then allowing fractional shares, which I wouldn’t be surprised happens in the next 14 to 30 days.

But wait, there’s more! They’re also allowing recurring investments. This is when you go and link your bank account to your investment account and then set it to automatically withdraw a certain amount of money every single day, week, or month, without you needing to do a single thing. I really believe that for the majority of people out there, the more they can automate investing and the less of a hassle it is to go and move money over to go and invest on a brokerage, the more people will do it and the more success people will have.

And finally, Robin Hood is also going to be allowing what’s called the DRIP, which stands for Dividend Reinvestment Plan. Now, this was a big complaint against Robin Hood because until now, anytime you got a dividend, it would show up as cash in your account. And until you saved up enough of that dividend cash to go and buy another stock, it would just kind of sit there. Now you could set it up, though, to automatically reinvest the dividends back into the same stock, which means you no longer have to think about buying back in or having to wait and save up dividends to buy a stock.

And again, through just automating the process and making it easier for you. Circling back to the new announcement, those dividends will probably show up as fractional shares. This is really big news because Charles Schwab was not planning to allow for fractional shares until sometime in 2020. But Robin Hood apparently is ready to begin rolling out these features to begin as early as next week. And this is going to be insanely popular for Robin Hood.

For instance, the investment app SoFi said that 78% of its members' first trades are fractional. And given that Robin Hood is pretty much on a level above everyone else, I think it’s safe to assume that they’re gonna be drawing in a lot more customers because of this. But in terms of how all of this works, it’s a little unique. See, typically when a stock brokerage offers a fractional share, they can’t just go and buy a fraction of the share on the open stock exchange. They have to go and buy the entire share in full and then give you on paper your ownership of the fraction of the share that you bought.

Now, doing this for most brokerages is not the most common practice, so it’s pretty typical that they will outsource it to a third-party company. However, with Robin Hood, anytime you go and buy a fractional share, they will be buying the entire stock, holding it themselves, and then slicing it up among whoever wants to buy it. Then whatever amount is kept over is kept within Robin Hood's own portfolio. Usually, this might be a little bit riskier for a company who’s holding onto all of these stocks in the event the stock market comes crashing down.

But because they're only holding onto a fraction of a share and given how much volume Robin Hood must be doing, even if the stock market is to drop in price, them holding onto fractions of a stock is pretty negligible when you consider just how many new users they will attract to their platform because of this. Now, unfortunately in the long run, it still doesn’t give Robin Hood a clear-cut advantage over Charles Schwab, at least until the cash management account goes live. But at the very least, it’s a step in the right direction.

This is because the majority of Robin Hood's customer base is millennials, and with that, a lot of them are beginners without a lot of money to invest. By allowing fractional shares and dividend reinvestment, Robin Hood can get a lot of new people investing on their platform with much less money — like I said, as little as a dollar. And that's gonna open the door for people to invest in larger, more established, more expensive companies that were previously out of reach, like Google and Amazon, without needing to come up with all the money for the entire stock.

It also allows its users much more diversification and safety by being able to invest their money and spread it out through many different companies instead of just tying it up within a few. That would give you a much broader investment and a much more stable return, all without the high cost of investing. Now, I have a feeling that if Charles Schwab wants to fight back with this, they'll need to unveil a cash management account that pays more than 1.7 percent in interest.

If they did that, they would be on a level playing field with the best banks and brokerages out there. And then from there, they could begin to implement other round-up features as well to further simplify investing and just start building up an entirely new user base. Because I really believe that now is going to be the defining point for many of these companies. There is a big wave of new millennial money just pouring into our economy, and whoever can capture that first is most likely going to gain the loyalty of those people for the rest of their lives. Especially the more they get intertwined in the overall ecosystem.

Like with Apple, just imagine banking with the same place that you get free stocks from, where you link your accounts to automatically invest, where you have your retirement accounts with, where you get your credit cards through, where you could then eventually get a mortgage from. That is what eventually I think all of this is going to be coming to. It's only a matter of time until we get the Amazon of banks and like one bank that rules them all.

And as far as Robin Hood is good of a platform as they think they are, they still have a long way to go and improve. For example, Weeble has already announced they’ve implemented a Roth IRA, and Robin Hood has yet to do this. Weeble is also going to be implementing free options trading and right now, with Robin Hood, they charge you five dollars a month for the privilege of doing that. In margin trading, I also really hope that Robin Hood will one day improve their customer service to the point where you can actually call up on the phone and speak to a live human being, and that is a major advantage that I feel that Charles Schwab has.

Robin Hood would also benefit from getting their cash management account live as soon as possible and then preferably doing a Robin Hood branded credit card with a sign-up bonus, of course, and really good rewards. I would like to see that. But overall, like I said before, this is all really good for you as the customer. Investing in fractional shares is a huge win in my book. The more these companies compete, the more they innovate, the more they race to the bottom, and ultimately, at the end of the day, investing just becomes cheaper and more easily accessible to more people out there.

So with that said, you guys, thank you so much for watching. I really appreciate it. As always, if you have not already destroyed the like button, make sure to destroy it, as is the subscribe button and notification bell, so YouTube notifies you any time I post a video. Also, feel free to add me on Instagram; I post here pretty much daily, so if you want to be a part of it there, feel free to be a part of it there. And also on my second channel, The Graham Stefan Show, I post there every single day I'm not posting here.

And finally, speaking of Weeble, by the way, they're holding a promotion for the month of December. If you use the link down below in the description and deposit $100, they're gonna be giving you 2 free stocks, and one of those stocks is going to be valued up to $1400. So if you want to have a chance to get a stock valued up to that, use the link down below in the description, sign up, do your thing, and enjoy those two free stocks. Thank you so much for watching, and until next time!