When investing, do you ever feel left out as the “little guy?” Like you don’t have access to the opportunities that large institutional investors get presented?
Well, if we glimpse into the future it does seem like the market of tomorrow will offer individual investors more access than ever before. That lovely little thing called the internet is starting to shift some investing leverage farther away from Wall Street’s trading floors and closer to those of us who may not be professional investors, but still want a chance at high returns in the market.
We aren’t quite there yet, but here are a couple of recent advancements that show the market moving in this direction.
Take a look to see how we almost have access to a couple exciting investing opportunities: commission free trading and early stage investing.
Commission Free (!) Trading…
Ladies and Gentlemen, please meet the Robinhood app. RobinHood isn’t the first trading app to hit the market, of course, but it is the first to offer commission free trades. You read that right, with RobinHood you’ll be able to trade cash stock positions without paying those $7-$10 fees charged by E-Trade, Sharebuilder, Scottrade and the like.
How do they do it?
As TechCrunch explains, “By replacing brick-and-mortar store fronts and legions of salespeople with an app and a lean engineering team, RobinHood can pass the savings on to its users.” They’ll also be charging fees for margin based and derivatives trades.
RobinHood is currently still in the beta stage, so the free trading hasn’t started yet. Although, there is clearly a market for these savings; even before its official launch, there is a waiting list of over 373,000 people.
Depending on Robinhood’s success, and all signs are pointing to “successful” at the moment (a little company called Google is backing them… ever heard of it?), their presence in the marketplace could drive more competitors into the space, and/or put pricing pressure on the online brokerages already there. With any luck those $7-$10 fees per trade could be coming down in the future.
Access to Early Stage Investing…
Aside from hefty commission fees, another limitation for the everyday investor has been the lack of access to early stage investing. VC’s and Angel investors operate by finding successful companies and investing in them early enough to gain equity in the company at ground level; it can be a risky practice, but one that potentially has enormous returns. Unfortunately those returns have typically been unavailable to the non-accredited investor… until now.
The rise of equity crowdfuding has begun to change that, slowly but surely. Make note, “reward” based crowdfunding and “equity” crowdfunding are not the same thing. If you’ve ever donated money to a Kickstarter, you are familiar with “reward” based crowdfunding. By helping fund the project, you got rewarded with a bumper sticker or, let’s say, a guest appearance in the “Veronica Mars” movie. Equity crowdfunding, however, offers shares in a company in return for helping get it off the ground financially. This is good news; if you truly believed in a company’s future success, wouldn’t you rather buy an ownership stake in that venture than a free t-shirt or coffee mug?
Now, equity crowdfunding isn’t quite yet a reality. In 2012, the JOBS act (Jumpstart Our Business Startups Act) was signed in hopes of bringing crowdfunding to the aid of small businesses that needed to raise capital. However, we are still awaiting SEC regulations that would formally extend this legal equity crowdfunding to everyday investors like you and me. As crowdfunder.com explains:
“Following on the success of donation-based crowdfunding, the JOBS Act now enables businesses to solicit funding from the general public – although only Accredited Investors are allowed to invest at the moment.
The JOBS Act also aims to expand investment opportunities to non-accredited investors, who have been historically excluded from this process. For the first time in our lifetime, every American will have access to invest in startups and small businesses and share in their financial success. The rulings that will allow everyone to invest in private companies is expected to take effect sometime in 2014.”
Now, even once its legality is cleared up, early stage investing is far from a “sure thing.” Certainly venture capital firms invest in far many more unsuccessful ventures than they do successes. And keep in mind, there is no Morningstar for Kickstarter companies.
At present, there is some built in protection for the everyday investor- currently you aren’t allowed to invest more than the greater of $2,000 or 5 percent of their income or net worth annually. As Scott Shane points out in Business Week,
“This is far less than the amount most Americans will lose the next time a housing bubble pops and their homes decline in value, or the stock market crashes, taking with it much of their 401(k)s.”
So, although there is risk, equity crowdfunding couldn’t exactly wreak havoc on a diversified portfolio. On the whole, its availability to the individual investor should be a positive shift.
There are still details to be ironed out, of course, but I believe individual investors should be encouraged by these trends in the marketplace. Whether via the Robinhood app or the focus on equity crowdfunding, the market is starting to look a little bit more inclusive. With the help of technology, the winds are changing ever so slightly in our favor. It should be exciting to see what other opportunities for non-institutional investors continue to emerge.