PALO ALTO -- It might be the simplest way to trade a stock: pull out a smartphone, open the green Robinhood app, tap three times and swipe.
And the trades are free.
The young entrepreneurs behind Robinhood are looking to disrupt the online discount brokerage world. The year-old company, founded by a pair of Stanford physics and math whizzes, has drawn legions of online fans and plaudits from the tech industry.
"If I walk down the street wearing a Robinhood T-shirt, I get ambushed," said company co-founder Baiju Bhatt. "It's kind of weird."
Robinhood joins a host of other discount brokerage services -- including established names TD Ameritrade, E*Trade and Charles Schwab -- to provide low-cost services and easy trading. Where other firms typically charge between $5 to $10 per trade, Robinhood collects no commission from those mobile transactions. The company makes money from interest collected on uninvested cash in customer accounts and other services.
All that easy trading may not mean more money for investors. A study by California researchers found that actively traded accounts through discount brokers earned less than money parked in low-cost index funds. "Our central message is that trading is hazardous to your wealth," said finance professors Brad Barber of UC Davis and Terrance Odean of UC Berkeley.
But Bhatt says the company is opening up opportunities for many new investors: "These people are saving money for the first time."
Bhatt, 31, and co-founder Vladimir Tenev, 29, met as undergraduates at Stanford University. They shared common bonds: both are sons of immigrants and grew up in Virginia. They spent two summers working at the same university research lab.
Bhatt said he took a job in the financial industry after school on a whim.
Tenev went to UCLA to earn his Ph.D. in mathematics. He left after about a year, collecting his master's degree, to form a company with Bhatt in New York City. Tenev saw an opportunity to make a bigger difference in the private sector than in academia, he said.
The two built trading platforms for Wall Street banks and hedge funds specializing in high-frequency trading. Advocates say the controversial practice makes the stock market more efficient, while others claim the traders create volatility and undermine market stability.
After a while, Bhatt and Tenev felt they could start another, more fulfilling venture. Their idea -- create a platform for zero-commission stock trades -- attracted a few early seed investors.
The app's design cues are simple and familiar: a trade looks like a multiplication equation, red lines mean a portfolio is going down, and green lines mean it's going up. A portfolio's value is updated in real time. Two buttons are labeled "Buy" and "Sell."
Robinhood caught early buzz after announcing its seed financing in December 2014. The video went viral on Reddit and Hacker News. It generated a wait list of 800,000 customers before the app fully launched in March 2015.
The company raised $66 million in three funding rounds, attracting support from traditional tech backers NEA, Andreessen Horowitz and Google Ventures and also rap mogul Snoop Dogg and actor Jared Leto.
The service is aimed at the first-time investor. Bhatt said the average customer is a man in his late 20s, relatively new to investing with an account balance of just under $500.
Customers traded more than $2 billion through the platform in its first year, with the company estimating traders have saved $50 million in commissions. Robinhood won an Apple Design Award last year for the app. In December, Google and Apple choose Robinhood for their best apps list.
The company's business model differs from other financial service providers.
Robinhood collects interest accrued on customer cash accounts, and will eventually charge interest on small loans made for margin trading. Bhatt said they receive a small amount per trade from security dealers who buy and sell stocks -- known as market makers -- to bring customers together. The business model also calls for premium accounts to generate revenue. While other firms spend up to $1,000 in marketing and overhead to attract each customer, Robinhood pays almost nothing to sign up its customers, Bhatt said.
The company enters a crowded and well-established field of competitors for low-cost trading. TD Ameritrade, for example, has provided discount trading services for more than 35 years. It counts six million customers making an average of 400,000 trades every day, according to the company. Schwab entered online trading in 1996, after two decades of discount brokerage.
Having access to the market in your pocket or purse can lead reasonable people to check their portfolios several times a day, Odean said in an interview. "You're more likely to trade when you're thinking about the market," he said. He added that his research over two decades has shown individual investors do poorly relative to the market when actively trading.
The problem for individual investors, Odean said, is that "they don't make good trading decisions."
But Bhatt believes the company is encouraging saving and investing over consumption. He believes the app could encourage foreign investors to buy stock in U.S. companies. "Everyone should be investing in our free market economy," he said.
Contact Louis Hansen 408-920-5043. Follow him at Twitter.com/HansenLouis.