The State of the Online Brokerage World in 2021
Stockbrokers never used to be this interesting and exciting. E*Trade may be the small exception over the past 25 years with its viral Super Bowl commercials featuring a dancing monkey. But other than that, the public never cared so much about stock broker companies.
The reason why this is the case is simple. Stockbrokers up until recent years targeted mostly people in the upper-middle-class and beyond. It didn’t make financial sense for a broker to target a new worker out of college with just $500 to invest.
But fast forward to 2021 and this is far from the case. A new-age online brokerage industry has been built that finally caters towards the “little people” — and the public is loving it.
Top Companies Dominate Headlines- Online Brokerage
Robinhood boasts among the strongest brand recognition names in the stockbroker industry, and for good reason. The platform is on a mission to democratize finance — that is to make investing accessible to anyone and everyone.
Gone are the days where hedge funds and wealthy families have sole access to acquire the best stocks money can buy. Granted, you can’t buy the same number of shares that Warren Buffett or Carl Icahn are buying, but with Robinhood and other platforms, you can at least buy something.
And something is certainly better than nothing, even if it is one-tenth of one share of Amazon.com or Apple.
The trend of offering something exciting to customers looking to maximize every last dollar is happening across the world, although to a different extent. In Canada, Qtrade and Questrade are two of the newer brokers vying to steal market share away from banks with roots dating back to the 1800s. Both of these brokers offer the ability to buy exchange-traded funds for free but only Qtrade offers the ability to sell for free.
While these platforms are certainly popular in Canada, it pales in comparison to the hype surrounding Robinhood. The company believes that half of all 18-44-year-olds in the US know who Robinhood is and what it offers. The broker ranked as the top downloaded app on the Apple Store multiple times in the first quarter of 2021.
Robinhood and eToro Both Becoming Public Companies
The Robinhood hype could merely expand as the broker is scheduled to become a public company before the start of August. Meanwhile, rival zero-commission and millennial-friendly broker eToro is set to go public in the third quarter of 2021.
Robinhood may have the upper hand as it is aiming for a valuation of around $35 billion. By contrast, eToro is settling for a smaller $10.4 billion valuation.
Robinhood is also giving its retail customers exclusive access to buy its shares before the general public. Typically, companies target hedge funds and heavy-hitters as part of the IPO process so they are able to sell tens of millions of shares in one shot. Certainly, its retail customers don’t have the same amount of cash.
But where eToro may have an advantage in terms of hype and excitement is it decided to go public through a special purpose acquisition company, commonly known as a SPAC.
eToro’s business combined with the SPAC FinTech Acquisition Corp who is already a public company that trades on the Nasdaq exchange. Doing so will buy default transform eToro into a public company just like a standard IPO.
SPAC deals were a hot commodity for most of 2020 and into 2021. Investors were buying up the many new SPAC deals that were announced, in many cases at bloated valuations.
If one were to bet on either the Robinhood IPO or eToro IPO, the fact that eToro chose the SPAC route means it is the leading contender.
The Perfect Storm for Stock Brokers: DIY Trading and Rising Rates
There are two main reasons why now may be the best time to operate a stockbroker business or to own shares of a stockbroker like Robinhood or eToro. First, the explosion in do-it-yourself trading and investing has resulted in many people experiencing potentially life-changing returns and there are no signs of this slowing down.
Such was the case with GameStop and AMC stock along with countless other “meme stocks” that exploded in value in a short period of time in 2021. The same holds true in the cryptocurrency universe with many coins like Dogecoin shooting to the moon.
Granted, it goes without saying that at the same time there are many investors who were on the losing end of the trade. While many investors made a fortune, many others lost a fortune. If anything this is a lesson in risk management and wise investing.
Buying a small amount of a meme stock or a joke cryptocurrency is advisable only if you can afford to lose the entire investment. Some key pieces of advice include having a game plan, including an exit strategy and a holding timeframe in the days — not years. So long as it falls short of occupying a huge part of your portfolio, a little risk is OK on occasion.
Now, another catalyst that stockbrokers can take advantage of is something that isn’t receiving much attention. See, anytime a client deposits cash into the broker account and it isn’t allocated towards an asset, the broker earns interest on the deposit.
Yes, that’s right. The broker earns interest on your money. In an era of rising interest rates, this means more cash in the brokers’ coffers. The pennies of interest that a stock brokers earn from each account adds up to a small fortune when we consider the millions upon millions of user accounts.