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Investor Share Trading Apps: Are you investing or gambling?

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Investor Share Trading Apps: Are you investing or gambling?

Sep 10, 2020Tyrone Wiseman

Investor Share Trading Apps

Are you investing or gambling?

Many of us will be glad to see the back of the craziness of 2020. The global pandemic of Covid-19 has ushered in a new era of social distancing, lockdowns, masks, curfews and restricted movements. It’s no wonder that the impact of this has caused Australian and international share markets to become incredibly volatile.

As you would expect, at WFS we consume a lot of financial news. If you do this too, you may have recently noticed those annoying ‘do-it-yourself’ trading ads popping up in your newsfeed. We have definitely become aware of the increase in ads promoting a variety of different trading platforms.

'Do-it-yourself' trading in the past

Traditionally, access to do-it-yourself market trading products was through buying books, or paying a fairly hefty subscription to some computer program that would let you in on the big secrets required to make your fortune:

Long-Term Secrets to Short-Term Trading by Larry R. Williams

But in recent times, like so many things, the business model has changed.

Now, it is all about the apps.

The increasing popularity of Trading Apps

As we already know, most social media and gaming apps are designed to be addictive. According to Facebook’s founding president, Sean Parker, speaking in BBC News, an app’s ease of use ‘exploits vulnerability in human psychology’, ‘changes relationships within society’ and ‘provides a social validation feedback loop’ through likes and comments. These work together to encourage the user to continue to focus their time and attention on interacting with the app. The new trading apps are no different.

Robinhood - the 'pioneer of commission free investing'

The app that has promoted itself as democratizing share trading is ironically named Robinhood. While it isn’t currently available in Australia, it has been rocking the boat in the US since 2013 with its commission free investment. Recent months have seen a substantial increase in new investors due to people being isolated, bored, or out of work due to Covid-19.

Targeted to millennials, and with a current usage in excess of 13 million investors, Robinhood gives users rewards each time they trade. There is a constantly updated ‘Leaderboard’ and traders ‘unlock levels’ when they progress within the app; ‘confetti’ is even released when the user places their first trade!

This gamifying of the process of trading and investing has had a significant effect on app users and the turbulent stock market of 2020. Robinhood’s colourful, exciting and easily accessible interface is designed to encourage young, inexperienced users to trade frequently. Some say they check Robinhood up to ten times per day – as often as they view their social media accounts.

While this use of technology can appear quite harmless, there have been many examples that just because you can do something, doesn’t mean you should. Trading with little or no investment education can make it very easy to get in over your head. 

The perils of App usage in Share Trading

Earlier this year, Alex Kearns, a young American man committed suicide, apparently as a result of a significant loss he thought he had sustained while trading options through Robinhood. On investigation, it is understood that the $730,000 loss he believed he had incurred was potentially due to incorrect, not up-to-date reporting in the app. According to other users at the time,

‘Options traders on Robinhood sometimes see a negative cash balance until the other half of their trades are executed… That does not mean, however, that this is a negative balance due or debt.’ - CNN

Bill Brewster, a relative of Kearns, told CNN Business, ‘The kids threw himself in front of a train over nothing, because a tech company can’t figure out they shouldn’t show a negative $730,000 cash balance to a 20 year old kid… How much are these guys thinking about the fire they are playing with?’.

Inexperienced investors are taking financial and personal risks through trading apps. Although many wish to educate themselves, they often turn to social media such as YouTube, Reddit and Facebook groups for information. Such free-trading platforms, with instant rewards, are making stock trading easier, cheaper and instantly accessible – but there are genuine concerns.

 ‘The tragedy has drawn attention to the potential dangers of the free-trading boom inspired by Robinhood, which has given young, first-time investors easy access to exotic financial instruments typically used by sophisticated investors.’

e-Toro - one of the world's biggest Online Trading Platforms

Available to Australians, eToro's big drawcard is its social trading feature that allows users to copy the actions taken by the platform's leading traders. Apparently free of commission, it’s simple to open a free stock investing account and start trading – but it is important to read the fine print as ‘only stocks traded on US stock exchanges are available to trade with no commission. Other stocks are offered as derivatives and bear commission.’

While many of us will choose never to invest through these types of platforms, their availability can impact ourselves and our exposure to certain shares.

Trading app effect on Hertz Shares

A recent example of such exposure is Hertz shares. As you can imagine, the past few months have been tough for airport rental car companies, and Hertz was carrying a lot of debt prior to the pandemic. But, after an initial post-bankruptcy filing nosedive, shares of Hertz rallied between May 26 and June 8. The price per share skyrocketed from 56 cents to $5.53 over that period, a gain of nearly 900%.

Why did shares of Hertz increase so dramatically in value after they declared bankruptcy?

It has been suggested that inexperienced Robinhood traders, potentially unaware of the bankruptcy, were day trading and forcing up the price of the company. Hertz shares have since coming tumbling back to earth. 

Robinhood, and other share trading apps tout their platform as ‘democratizing share trading’ by making the opportunity available to everyone. In reality, online trading was democratized in Australia with the creation of CommSec in 1997.

So, with all the sensory rewards of confetti, flashing lights, noises and levelling-up, when you trade shares by tapping the screen on your phone, you really have to ask the question - are you investing or gambling?

If you are curious about share trading and investment, please get in touch – it’s wise to do your homework and educate yourself before making your first move.