If you are not paying for the product, you are the product.

This statement, for a variety of reasons, has stuck with me ever since I watched the popular Netflix documentary called The Social Dilemma. When the person who was being interviewed dropped that powerful statement on camera, he reminded me that nothing in life is free. No matter how persuasive marketing can be, nothing and I mean nothing is free.

In the case of social media, your buy-in is your privacy. On the other hand, if you really don’t care about how much data mining is extracted from your life by billion-dollar corporations, you could say your buy-in is meaningless. Perhaps one day that might change when you start to notice your cell phone is actually picking up your private conversations and in return is showing you advertisements based on keywords of that conversation. Yes, Golf Town, I’m talking about you!

Speaking of free services, this week the trading app Robinhood went public on the Nasdaq. If you’re not familiar with Robinhood, the company provides U.S. residents the ability to buy and sell a variety of investments without paying any commissions. In Canada, companies such as Wealth Simple or Questrade would have a similar business model as Robinhood.

So how exactly does Robinhood make money if their services are free?

Majority of their revenues are generated by funneling investors orders to big trading firms, such as Citadel Securities, which take the other side of the trade. In exchange, a payment is given Robinhood. Basically, the more investors trade for free on Robinhood’s platform, the more revenue the company generates by outsourcing their trades to companies like Citadel Securities. In return for these outsourced orders, Citadel Securities makes money by selling stocks or options for slightly more than it’s willing to buy them. The difference is often just a fraction of a penny per share. But repeated millions of times a day, it adds up to serious money ladies and gentlemen. This business model is called “payment for order flow” and it works best when retail clients spend their entire day on their phone day trading stocks. Remember the frenzy with meme stocks such as GameStop, AMC and Blackberry this year?

“If you are not paying for the product, you are the product.”

So, if our privacy is our buy-in to use our social media accounts, what is our buy-in to use Robinhood’s free trading application? The answer is your time.

Robinhood makes money when you trade stocks in your account but makes even more money when you trade more stocks and since trading is free, there is no cost deterrent towards entering or exiting a position. This approach can turn even seasoned do-it-yourself-investors into speculators since trading costs are no longer a factor.

What is this week’s takeaway?

Beside nothing in life is free, day trading stocks does not guarantee results. In fact, I would confidently say you’re increasing your risk with a speculative mindset since majority of your investment decisions could come down to emotions rather than fundamentals.

Next time a company offers you a product or service for free, ask yourself what exactly is your buy-in. Depending on your personal situation or values, knowing your buy-in might be a key component to your own decision-making process.

Have a great weekend!

Michael Zagari