The popularity of DIY investing have transformed the options for buying and selling investments of the years. That same demand has also driven down the cost of doing it.
The first generation of trading platforms challenged traditional stock brokers with their low fees, but remained relatively complex to use. The more recent development of free of zero-commission trading apps like Robinhood, eToro, and Freetrade have almost gamified trading stocks and shares and introduced new and younger investors to markets and their risks.
The zero-commission and easy-to-use apps have essentially brought the barriers of entry to trading down to near zero, with many platforms allowing new users to sign up with deposits as low as £5, and with sign up bonuses on offer for those that deposit higher sums. However, users should be aware that zero-commission does not mean that trades on these apps are completely free. Instead of charging flat fees per month or per trade, the apps generate their profits via what is known as the “bid-ask” or “bid-offer” spread, which describes the difference in price between what at which a stock can be bought or sold at any specific time. On highly traded stocks, such as Apple or Tesla, this spread can be minimal, but with more illiquid stocks the spread can be up to ten or twelve per cent.
Millions of new users have signed up to these trading apps over the last year, partly driven by press coverage and partly by furloughed workers deciding to try their hand at stock trading whilst sat at home with furlough money still coming in but no work or social activities to fill their time. Indeed, online searches for the best online trading platform in the UK peaked around March and April 2020 according to Google Trends data, but interest still remains high.
Signing up to a trading app during the first few months of the pandemic could also have seen new users find their biggest gains within only a few weeks, as many stocks that crashed in Spring 2020 rapidly bounced back. Some new users that signed up last year saw their original investment double within a few weeks. Such early successes can significantly impact how people interact with the apps and would encourage further investment, despite the reality that finding similar quick wins again would be relatively unlikely.
Some commentators have raised concerns that the gamified nature of many of the trading apps encourages users to treat tracing as a form of gambling, when instead they say investing should be seen more as a long-term strategy. Moreover, whilst some users have made impressive returns, it can be difficult for individual investors to compete against professional traders that have access to much more in-depth and relevant financial data and high frequency trading tools.
Zero-commission trading apps have democratised the markets, with members of the public now able to compete with professionals, banks and pension funds. The returns can be lucrative and the process enjoyable, but new users should be aware that the value of their stocks can go down as well as up and whilst the latest stock hyped on Reddit or Twitter may sound exciting, everyone should do their own research before investing their own capital.