Now More Than Ever, Smaller Investors Make a Big Difference.
Over a the past twenty or so years many regional and national banks would come to find profitable customers lying just below the surface of premium account holders with large daily and monthly balances. So out went the offerings of the infamous toasters and blenders, in came the lure of interest bearing checking accounts, competitive CD rates and eventually checking accounts for all. Banks learned the profit was in the everyday small account, through fees and charges, these accounts may prove far more profitable in the long run than the high balance accounts. Even credit card issuers would become to understand this, between fees, charges, floating interest rates based on balances and dare not forget the interest on top of compounding interest for late fees. Credit card issuers make so much more profit on the smaller accounts, so much, that from time to time the government has to step in a make new laws regarding interest rates and minimum payments. Accounts with small balances and high costs can sometime be almost all profit, surely, more profitable than the customer that balances their check book, pays their bills on time and completely pays off their monthly balance. It would be just a matter of time before this approach would work its way through other areas of the finance industry, and soon enough with the help of internet access, the investing branch of the finance industry would also be able to reach those highly valuable customers as well albeit for varying reasons.
Typically in the minds of the average non-investor, buying stocks and bonds either was or in some cases is something that is behind the high wall of Wall Street. Stock picking and investing in general can be confusing, cryptic, and intimidating for newbie investors altogether. Participation in Wall Street activities, stock or bond investing usually implies that you may either have a bunch of money or need a bunch of money to participate. Wall Street is also known to have a set logic and language all of its own and if you’re not in the know or familiar with its vernacular or logic, it isn’t for or available to the uninitiated. Without having someone or some entity such as a broker or advisor to usher you in and explain the details of how things actually work, how much money is needed and a general sense of how to evaluate potential investment prospects at a most basic level then most potential clients and investors are left to speculate. That lack of direction only makes the situation worse leaving would be new small investors to sometimes guess how to go about investing and what investment vehicles to consider for their specific goals. Many national banks have tried to tap this potential by putting an advisor inside many brick and mortar branches to no avail, they have other potentialities to chase after anyway. Sure, there are many people that go out and learn on their own to understand the basics, however, a far greater number are left on the sidelines who want to invest and grow their monies. The brokers, financial advisors and stock dealers were usually out of reach and really not so interested unless a potential client had about $10,000.00 or more to invest or close to it. Brokers weren’t reaching out and calling potential clients that had maybe $100.00 a month to offer up for ongoing investments, that sounds more like go open a bank account and get a free toaster in the pre-internet era, call us when your money grows up. Neither were the folks who were diligently saving their money at the local savings bank reaching out to brokers to open brokerage accounts and invest, primarily because in their minds it was considered out of reach and something that was for the rich and the wealthy. Sure people would at times talk about getting in by buying “penny stocks”, which are generally viewed as the lowest entry point for stock investing, but probably should be viewed as “Stay Away”.
A look back over the pre-internet to digital age transition years makes it abundantly clear that it was just a matter of time before up and coming brokers with new and creative approaches would realize the same things that bankers and credit card issuers came to understand. Although mega accounts and large individual or wealthy clients was what all the brokers were chasing, there was so much more being left on the table. In the digital age, discount brokerages are now able to reach smaller less wealthier customers, and there are a greater number of these customers. As it has been stated in everything from union strikes to “occupy” movements, there is a greater number of less financially wealthy, working class people than there are super rich and wealthy. Those people, the 99% or 98% whichever argument you may subscribe to, a good number of them do save and invest diligently like clockwork and regardless of their level of financial sophistication they would also like to invest even more. There are many brokerages that serve this segment, a thriving segment of hardworking people that are willing to diligently save and invest for their future and large enough to support a sub industry of discount brokerages. It took Wall Street some to take notice and see how much these folk are tucking away in their 401k’s and 403b’s, it’s estimated that $500 billion will be contributed to employer based retirement plans by 2019 according to the site www.retirementincomejournal.com , so it’s clear that the little bits of money thing is working.
Some of the latest and popular discount brokerages are now building entire platforms just to serve that everyday small investor, whether the investor is on a monthly recurring deposit, investing change from purchase roundups or one time purchases. This concept completely sidesteps the need to become ultra-savvy in investment or stock trading terminology, no studying a company’s return or P/E and no looking up mutual fund ratings with 5 year returns. Investors basically set up their account, on smartphones in many cases, select moderate to aggressive goals, choose how much to deposit from which source and when… and that’s it, you’re investing. You’re buying into the S&P 500, The Dow, Ford, Apple, a mutual fund, an ETF, a stock or bond portfolio or whatever they’re calling it at the moment, even if you don’t know what the S&P 500 really is. You can log on anytime from anywhere and see what your portfolio is doing, if it’s up, down or sideways. And while there’s more to consider like why it’s called the S&P 500, actually you don’t have to, it isn’t necessary to be as savvy and knowledgeable as some guy day trading sitting in front of three screens all day smoking camels and drinking coffee by the quart. Nor do you have to be some big time investor with a boat load of money with an advisor in your ear giving you play by play confidence, you can be the same you that has to be to work by 8:30 am and still invest a little bit every payday, once a month or whenever you decide. There’s even a new broker that’ll round up every purchase every time you swipe your bank or credit card. Swipe- a little bit goes, Swipe- a little bit goes… without getting all fancy and sitting up all night trying to figure out how to and how much. Remember, you gotta be at work in the morning.
In previous years when the discount brokerages started flooding the internet, I had opened a couple of accounts, some did well and others did ok. What was very interesting for me was that although the discount brokerages were not full service, they offered tons of information for me to learn about investing, investment products and how to buy them. Without talking to anyone, which usually includes a pitch for a sale, I was able to get informed to my level of satisfaction. It dispelled all sorts of myths and misconceptions about investing and buying stocks or bonds in general, confirmed some popular wisdom and allowed me to explore different investment options with a bit more confidence. There’s been some consolidation in the industry over the years with the companies purchasing each other, (they’re just realizing the value of the customer base is all) but the good thing is the industry is also evolving and offering even more now. Better service, lower brokerage fees, broader range of options for more investors to get in.
Here are 3 of some of the best discount self-service style brokerages that are great for entry level investors or anyone looking to invest using smaller amounts to get started and invest too.
- www.Sharebuilder.com Previously Netstockdirect, this company is now owned by Capital One, however, they still offer low cost trades, have tons of information about the how-to’s of investing for newbies and explain a lot of details. They typically pool your monies and make stock purchases down to fractional shares once monthly, there are NO Minimums and they also let you buy shares at any time just in case you want to invest that tax refund.
- www.Betterment.com Offers automated monthly investments into ETF’s, (basically a mutual fund style basket of sectored stocks that are traded like individual stocks) ETF’s are super-hot right now because of how they can focus on a specific sector of the market like Real Estate REITs or Energy and trade like stocks, this company offer a great variety of ETF’s with target date plans and low fees for investing. They really make it very easy to get started and track your progress regardless of your goals. Betterment’s interface is friendly and they also offer a lot of investment information without making new investors feel too overwhelmed as if they’re getting into something too deep.
- www.Acorns.com This brokerage has a very creative approach, investors can set specific amounts, one time amounts, recurring amounts and most unique of all is that investors can register their bank or credit cards to round up to the nearest dollar following each purchase or transaction. All of the rounded up deposit are used to make mutual fund investments typically once monthly. There’s also smart phone registration and account access with competitive discount brokerage fees. It’s simply amazing how the change adds up in less than 1 month. In recent years one of the national banks offered something similar (maybe that’s where Acorns got the idea), but it wasn’t so great. Acorns’ deal is really cool by allowing a double down in one move by saving and investing, maybe that bank should give them a call and open an account too so they can see how it should really work.
A little researching will probably yield some more brokers offering similar accounts that allow for small or even no minimum amounts to invest monthly. You can compare them side by side to see which may work best for you or try using more than one depending on your investment approach as they offer different ways to invest. Either way, it seems great that regardless of your investment level or expertise, there’s room for anyone and everyone to get in and reach for their financial goals.
I have no specific ties to any of the brokers mentioned and receive no compensation for any recommendations, I have however used some of these discount brokers to invest, learn and get a better understanding of investing and investment options and feel they are great for getting started in investing in general for stocks, bonds and other financial instruments.