In the past five years, there's been an explosive growth in startup tech companies trying to disrupt one of the largest markets: the financial market. According to VentureBeat, private FinTech companies have raised nearly $3 billion in the past year, triple of what was raised in 2008 ($930M).
FinTech is a broad term that relates to anything and everything that has to do with money. From online personal lenders, payment processors, credit monitoring, and personal finance management tools, every company is looking to take a piece of a trillion dollar industry. Open source software and cloud technology have lowered the barriers to entry for emerging startups in the past five years. One sector in particular that's seeing a huge growth is in the investment sector.
Investment startups are allowing us to excel in three main components of investing: a more cost efficient approach, a smarter way to invest, and the ability to have easy access to the tools we need.
A $7 Trade Can Be Pricey
Most brokerages today such as Scottrade & E-Trade charge a "nominal" $7 fee for each trade. So a roundtrip trade will end up costing you $14. It might not seem like much but this puts inexperienced traders who wants to start small at a disadvantage. For someone who wants to start as little as $500, they need to make a 3% return to break even.
One startup that's ready to tackle this problem is RobinHood. They're a commission-free stock brokerage with no minimum deposit required. According to their website, they're still in private beta and isn't available to the public but they've managed to raise $16 million in funding. How they make money was a little ambiguous on their website, but my guess would be that they would make interest on margin trading and collect interest on cash balances. It looks like RobinHood will be mobile first, which makes sense because it allows for fast execution of trades on the go as well as catering to the millennial investor.
Remember the days when we used to have stock brokers cold call consumers and pitch stocks? Those days are pretty much obsolete. Having quick access to information can help us sift through thousands of different companies in a matter of minutes. For beginners who are just learning the basic fundamentals of trading, figuring out the best way to get started can be daunting.
There are two start-ups that can help an amateur invest like a pro without taking on too much initial risk. Nvestly is a social network that allows users to see top investments from real portfolios. Although they won't share the exact dollar amount someone holds in a company, you can see how their overall portfolio has performed over time. They added a nice social component that allows you to chat with other investors to bounce off ideas. By implementing features like cashtags (#hashtags for stocks) and mentions, they make it easy to get input from other investors that currently hold a specific stock. You can also get notified when someone you follow makes a trade or sells a stock or fund that you're currently invested in.
Another startup , Acorns, is adding a completely new twist to the idea of investing. Their whole concept is investing your spare change from everyday purchases into carefully vetted portfolio. So for example, if you went out and purchased an expensive $4.60 latte at Starbucks, you can round up the purchase to $5.00 and put the spare change into your account. Assuming you make three debit/credit card purchases per day and you're rounding up fifty cents per transaction, you'll be able to invest roughly $45/month. This definitely isn't a retirement plan, but this should essentially be viewed more like a savings plan. Based off my initial calculations, it looks like in about twenty years someone can earn $25,000 off a $10,000 investment.
Accessibility, Accessibility, Accessibility
Ever wanted to buy a share of Google but couldn't afford the $500/share price? Apple recently did a 7:1 stock split to make each share more affordable to individual investors. If you've ever wondered if you could buy a fraction of a stock, this is one of the many benefits that LOYAL3 offers consumers. With LOYAL3 you can invest as little as $10, without any fees, regardless of share price. For example, if you wanted to purchase Google stock but didn't want to purchase a full share, you can invest $10 to own a fractional share of Google on LOYAL3. You can also set up a monthly recurring investment in your favorite brands. The feature that I find most compelling with LOYAL3 is the ability to allow individuals to participate in IPOs. Currently, only institutions and investors are able to get a piece of this pie.
Investing in a hedge fund today is virtually impossible. SlicedInvesting is a new startup that allows investors to access pre-vetted hedge funds with dramatically low minimums. The concept is simple. By pooling the capital from hundreds of investors, it allows them to meet the minimum investments that are set by hedge funds. In order to invest with Sliced the minimum amount needed is $20,000 and you must be an accredited investor.
These five companies are positioned to really change the way consumers think about investing. By empowering individuals to have easy and affordable access, it simplifies the complex world of investing. Are there any other companies that are making an impact in this sector? Would love to see your comments below.