A new startup is trying to disrupt discount brokerages, targeting novice investors who want help trading.
“Instavest is a website where you can make, share, and follow the investments of lead investors for a portion of the profits,” said co-founder Saleem Khatri.
Khatri, a Harvard business school alum, has a unique take on investing, having worked at Goldman Sachs and at the U.S. Treasury.
“I saw that good investment advice was reserved for the wealthy and wanted to make it available to everyone,” he told CNBC.
So Khatri and co-founder Zain Allarakhia launched Instavest in March with a goal of making profitable investments available to everyday people.
Follow the leader
When members open an account on the Instavest website, they register as either a “lead investor” or “investment follower.”
Instavest approves its lead investors, who then purchase stock through the website and post the investment rational behind their trades. In turn, followers can choose to make the same investment.
Instavest charges $3.49 per equity trade, but its brokerage partner pockets that fee. In addition to the base rate, “followers,” can opt to pay leaders a voluntary tip, which Khatri said averages 10.6 percent of the profit made on a trade.
These tips are seen as a way to motivate leaders to continue sharing profitable investment ideas. The startup itself takes 20 percent of all tips. Its brokerage partner also pays Instavest up to $500 for each new user who initiates a transaction.
New York Angels board member Alicia Syrett pointed out that brokerages could offer an Instavest-like option to existing clients, which would destroy the startup’s stand-alone model.
But the founders are confident they’ve built a sustainable business.
“We believe that day trading is not actually good for the long term. But we want brokerages to actually acquire those customers, so that they can trade over a long period of time. Now if we coupled that with making good investments that have analytical rigor behind them, it’s a win-win situation for all of us,” Khatri said.
Nat Burgess, president of Corum group and former member of the SEC’s enforcement division, questioned how the founders would prevent pump-and-dump schemes.
Khatri said Instavest enforces a 14-day holding period for leaders. Additionally, the platform only permits trading on the Nasdaq and NYSE, and does not allow trading in penny stocks. “In our opinion, that eliminates sort of 85 percent of the risk right there,” he told CNBC.
Headquartered in Mountain View, California, with just three full time employees, Khatri told CNBC his startup has grown 5-7 percent a week since inception.
Instavest says it’s on track to hit over $200,000 in sales in its first year, and has raised upwards of $1.3 million in funds from investors like seed accelerator Y Combinator, venture capital firm FundersClub, and angel investor and former hedge fund manager Donald Dion.
Image credit: CC by Alberto Carrasco-Casado