It’s easier than ever to become an investor. But with so many options to choose from, it can be quite daunting to figure out which platform is right for you and your situation. The choices include stock trading apps, discount online brokerages, micro-savings apps, and robo-advisors. Although there may be some overlap, each platform performs distinct functions better than others.
These apps all serve the purpose of removing the barriers that have once prevented many people from investing.
My goal is to help explain the differences so you can decide the best investment tool for your needs.
What are Discount Online Brokerages?
A discount online brokerage is often associated with companies like Charles Schwab and Ally Invest. A discount broker is a stockbroker that performs buy and sell orders at a reduced commission rate. Most discount brokers operate using online platforms without the need to directly engage with a stockbroker.
Trades are completed using the online platform reducing the cost thus discounting the commission you’d pay. However, since upstart investing apps like Robinhood began offering free stock trades, many online brokerages eventually began offering free stock trading or zero-commission trades.
You pay less using an online brokerage, however, you’re in charge of managing your trades. If you need the help of a broker, it may be available with the same platform, but requires additional fees.
What can you do with an online brokerage account?
You can buy and sell stocks and index funds. Additionally, many platforms offer research tools and a knowledge base to help you make better-informed trades.
Who is it for? For investors who want more trading capabilities and the lowest commissions and fees for trading stocks, mutual funds, and exchange-traded funds.
What are Stock Trading Apps?
A free stock trading app was a mobile-first investing service that allows you to buy and sell investments without paying a commission.
The Robinhood app was the first to enter the market offering investors an opportunity to buy and sell stocks without paying the per-trade fees. Since then many other investing startups and online brokerages followed suit and now offer zero-commission trades.
With free stock trading apps, you can buy and sell stocks as you would with online brokerages. There are some tradeoffs. Some mobile-only trading apps may not offer desktop access, have limited research tools, and delayed execution of trades.
Who is it for? These apps are great for people starting out and don’t want the complexity a full online brokerage offers although apps like Webull go the extra step with a community forum for traders.
What are Micro-investing Apps?
Micro-investing apps help people accumulate investments in a small incremental way. Some apps allow investors to start with as little as $1 to buy a fraction of shares or ETFs (exchange-traded funds). The goal behind micro-investing is to open the stock market to people who may not have hundreds or thousands of dollars to get started.
With micro-investing, the goal is to make frequent automatic deposits that would then be used to buy investments. Since the amount is often smaller than traditional investments, a person new to investing can benefit without extreme effort.
Frequent automatic deposits can be done by either rounding up purchases to the nearest dollar (like Acorns) or setting up automatic and recurrent transfers (like Stash) with as little as $5. Most micro-investing apps will invest your money into a designated ETF within specific industries or based on interests or values.
An example of the micro-investing app is Acorns that rounds up your purchases to the nearest dollar. Once you’ve saved $5, Acorns will invest that amount into an ETF automatically for you. In contrast, the Stash app allows you to invest as little as $5 in specific industries or based on your values.
With both apps, you can set up automatic transfers from linked checking accounts to increase your investing rate.
Who is it for? Micro-investing apps are great for people new to investing and want to start small with little effort. The convenience of small incremental withdrawals from your checking account into a micro-investing account can mean you won’t notice the impact.
What are Robo Advisors
A robo-advisor is distinct from the other platform as it offers guided advice through an investment philosophy and proprietary algorithms.
A robo-advisor app gives smaller investors access to advisory services that were typically only offered to high net-worth individuals. These platforms offer you the opportunity to invest smaller amounts and pay lower fees compared to traditional investment advisors.
If you’ve heard the term wealth management, then think of robo-advisors as online wealth management platforms. They offer algorithmic and automated portfolio management.
Robo-advisors can assist you with setting targeted retirement goals, college savings plans, tax-loss harvesting, portfolio rebalancing, 401-k investment reviews, and other retirement accounts and more.
When you open an account with a robo-advisor expect to answer questions about your goals, risk tolerance, age, and desired retirement. Based on your answers, their algorithms will then recommend a portfolio of stocks, bonds, and other investments. Expect most recommendations will be low cost indexed funds or ETFs.
Robo advisors often have zero or low initial deposit requirements with fees based on your account balances assessed per year. These fees are lower than what you’d expect from traditional investment advisory services.
Who is it for? Investors who want online financial advice or investment management support with minimal human intervention.
Which platform should you use?
It all depends on your goals and the help you need to reach them. In my own investment journey, I used many platforms and have gotten great insight from each. I foresee myself continuing to use online brokerages/stock trading apps, micro-investing apps, and robo-advisors. They all serve a distinct function.
You don’t have to do as I do. And this is in no way investment advice. What I want to share is that these apps all serve a purpose. It may be a matter of you figuring out the best and easiest to get started.
What about retirement accounts?
If you’re thinking about tax-advantage accounts like IRAs or help with your 401-k, then look into robo-advisors. You can see the robo-advisors we’ve reviewed in the financial marketplace and filter the results to find the platform that will offer you guidance with your 401k or IRA.