Why are new small investors piling into share-trading apps

In her spare time, Andrea Ion, a 25-year-old Londoner, signed up for two stock trading websites at the start of the coronavirus pandemic.

“My boyfriend and I ended up in this little apartment in London and we thought we had to do something or we were going to go crazy here,” she recalls.

In the past year, young investors like Ms. Ion have flooded online stock trading platforms such as eToro, Freetrade and Robinhood.

Now, she and her boyfriend Jamie post together on Instagram about their investments.

“We are witnessing an era where anyone can easily invest and accumulate wealth from their phone, with near-zero transaction costs,” says Ion, who lived in Romania until he was 18 and has just completed a master’s degree at Cambridge University.

But is this wave of new investors a good thing?

Adam Dodds, managing director of Freetrade, says participating in the exchanges is beneficial for participants: “I liken it to eating a healthy diet or exercising. It’s a healthy habit,” says Dodds.

It certainly did his business good.

The number of registered Freetrade customers has increased six-fold in 2020, from 50,000 in January to more than 300,000 in December and 700,000 today.

Nearly 60% of them describe themselves as inexperienced investors, and their average age is 31. In addition, one in four platform investors is a woman, up from 13% a year ago.

And it’s not just Freetrade. Other platforms are seeing an influx of new customers. Robinhood added 3 million users in 2020, an increase of 30%, and eToro added 5 million, an increase of almost 40%.

One of the ways in which trading applications have lowered the barriers to participating in investing is through splitting, which allows users to buy shares of entire securities.

For example, shares of Elon Musk’s Tesla were worth $880 in January, while today they are worth about $688.

For some investors, buying a stock means spending all the money they have to invest. Thus, buying a high-quality stock allows small investors to make other investments and spread the risk.

But this investing frenzy is worrying for some people. Constantin Gurdjieff, a professor of economics at Trinity College, Dublin, points out that online discussion forums and social networks can put all sorts of pressure on inexperienced investors.

For example, they may be more easily persuaded to join the herd of investors and invest in an overvalued stock, or the perception of lower costs may induce them to trade higher than necessary.

According to Professor Gurdjieff, risk management and analysis is reduced and the fear of losing oneself is accentuated.

“Research shows that the greater access to trading and sense of lower cost offered by these platforms leads retail investors to take risks and overtrade,” he says.

According to him, trading can even become an addiction for some.

In this new era of commerce, so-called “meme” or “Reddit” actions have emerged. These are actions that have been promoted on social networks.

Video game retailer GameStop is perhaps the most famous example of late. In January, its stock price rose from $17.25 to $483 after participants in a Reddit forum called Wallstreetbets urged investors to buy.

“I think we will see meme stocks again,” says Lewis Harding, a 23-year-old from Leeds who blogs about his investments.

It considers that, after registering on the trading platform, investors should receive free training before they start trading.

The previous wave of so-called retail investors appeared in the 1990s, initially in the United States.

Online brokers such as E*Trade and Ameritrade have been featured on services such as CompuServe and America Online.

Their commissions, which ranged from $5 to $7 per trade, were significantly lower than those of the well-known brokers of the time and opened up the market to small investors.

Many online trading applications have reduced these commissions to zero, opening the door to new investors who do not have deep pockets.

But the way commerce applications make profits has its detractors. Many of these applications involve what is called a pay-per-order flow.

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