Free-trading Apps –The Best Thing Ever or the Worst Thing Ever?
Free trading Apps, like Robin Hood in the US and Weathsimple Trade in Canada, have risen to popularity, especially with young investors who like the app-based approach and the fact that the sites do not charge commissions for stocks, options or cryptocurrency trading. They also offer new investors the chance to set up an account without having a lot of money to invest. After talking with some young investors, we are both happy to see these new investing options but also concerned that they are creating some risky behavior.
Best Thing Ever.
First the good news. Because these Apps were designed for the inexperienced investor, they are very easy to use and lowers the bar for people to start investing. People are often intimidated by Finance or Investing and might choose to keep their money in the bank rather than exposing their ignorance. These Apps lower the bar and make it simple to get started with just a few dollars. And as any Investment Advisor will tell you, getting started investing early is one of the best decisions you can make.
Once you’ve made the leap and signed up, buying and selling is intuitive and straight forward and you can made trades of very small quantities and even fractional quantities of stocks, currencies, options and cryptocurrencies. In this way, even with a little money you can buy a small number of shares (or even fraction of shares) of a number of different companies in different industries, creating a well-diversified portfolio, which should be a primary goal. Before these Apps came around, only very wealthy people had enough money to build a diversified portfolio with individual stocks and most people relied on Mutual Funds or ETFs.
So, we like that fact that these new Apps make investing more accessible to more people and get people investing sooner. It’s also great that anyone can now build their own diversified portfolio with just a small amount of money.
Worst Thing Ever.
Because it is an App with a modern and easy to use interface, you can constantly check the performance of your portfolio. Investing should be a thoughtful process with a long-term planning horizon. Typically, you should be checking your portfolio every month or so and making decisions to adjust your holdings every quarter or so. But with these Apps, people are checking their portfolio multiple times a day and seeing opportunities for some quick profits (since there are no buying or selling costs). So, the investing experience can become fast paced and game-like. Without transaction costs (which discouraged taking small profits in the past), why not buy 1/10 of a share of Tesla at $1,450 in the morning and sell it at $1, 460 in the afternoon and make $1. That is happening and these Apps are creating a new group of very inexperienced day traders.
So, why is that a bad thing? We’ll do a full blog on why day trading is dangerous in the future but the short answer is that unless you are a professional with the resources and technology of a hedge fund or other financial firm behind you, you probably won’t be successful at day trading. Since day traders are usually private individuals, there is no way to get good statistics on how well they do as a group. But you don’t have to go far before you meet someone who “used to day trade”. When the market is going up, you can make a lot of money but when the market turns, you can lose just as fast. And, as we’ve said time and time again on this blog, no one can predict when the market is going up or down – day trading becomes gambling, not investing.
Free trading Apps have the potential of getting people into investing early and allowing them to easily build diversified portfolios. But it is quite easy to get lured into abandoning a strategy that focuses on the long term and instead attempts to make some quick profits by holding stocks for just a few days, or just a few hours. Our advice is to go ahead and have some fun with the apps and do some short term trading – but only for a small percentage of your portfolio – say 10%. Remember that the purpose of an investment account is to save for the future and your investments should be for the long term – the app is not a casino!