The low barrier to entry for investment apps and websites like Robinhood, Etrade, Public, and Charles Schwab means that stock trading and investing can now more readily be accessed by anyone and everyone. Many of these platforms have moved to offer no or low fee services and reduced investing minimums. Now we have the easy ability to invest via a smartphone app which constantly tracks your investment’s ups and downs, gamifying the market. But is this easy access a good thing for the average investor who no longer needs to go through a broker or financial advisor to make a deal and who could advise them on their purchase? Does the lack of knowledge and financial skin in the game actually benefit the average investor who can now play around with $100 in partial stocks?
The old adage is true: if you are not paying for the product, you are the product.
Investment brokers exist to make money. They make money off of either receiving payment directly from consumers for brokerage services they provide, including affecting trades and offering professional investment advice to clients, or by selling advertisements they can put in front of their growing number of client’s eyeballs when they log into the trading platform’s app or website. Making money via advertisements doesn’t mean that the company is somehow ethically compromised and not to be trusted, it just opens up another revenue stream for the company and allows more people access to trading platforms by lowering the financial barriers to entry. More people accessing their trading platform means more advertising dollars.
This ease of access for plebians to enter the world of investing and trading stocks seems like a good thing, because it allows fair access for anyone to make (or lose) money on the market and removes the stigma that investing is only for people that already have a lot of money. Democratization of investing is a laudable ideal, but it can also bring access to the market from uninformed masses. People that are not working through a gatekeeper broker or adviser which would inform them about investing strategies and guide their choices may end up making quite poor investment choices.
Sure, there will be those who do their own research and are able to make their own modest investments into the market thanks to diminishing account minimums and save on fees by doing it themselves online. But there will be many more that will jump into investing on a lark and sink their dollars into whatever stock is trending on Reddit. This new unfettered en mass access by an uninformed or partially informed investing pool can make market waves, as seen in the internet-fueled pump and dump scheme wherein thousands of small investors schemed via Reddit to artificially inflate the price of GameStop in retaliation for hedge fund managers shorting the stock, primarily using the app Robinhood.
This ease of access to investing via low or no fee investment apps and websites sounds like a dream, but does it have a hidden knowledge cost? Paying for something can make you value it more, and if you are not paying for investment advice and are not paying a broker to execute trades on your behalf, are you fully informed on your investments, strategy, and market trends? Trading without an investment advisor or guide can be a bit like hunting while blindfolded. Sure, you may still shoot a deer but it’s more due to luck than skill. More likely you will waste a lot of money (or ammunition in this analogy) buying and selling, taking losses and making small gains. Without an overall investing strategy and knowledgeable advisor to guide you, these platforms benefit from the average consumer’s lack of investing knowledge, raking in money on small commissions from sales and from investing their customer’s money while it sits in accounts with the trading platform.
So is it really in your best interest to invest with a low barrier to entry trading app or website? As with most advice, it depends. If you are working with a knowledgeable financial advisor, have an overall investing strategy, and are making investment decisions based on that strategy, then there is certainly no harm in saving yourself some dough by not paying fees for making trades or having to wait until you have a larger investment minimum. If, on the other hand, you are not educating yourself on market trends, you don’t have an overall investment strategy, and you are buying and selling on the whims of Reddit, you may find yourself taking frequent losses and not making any headway in growing your money. Low barrier to entry platforms can give you an opportunity to dip your toe into the stock market with a smaller investment amount and save you money on brokerage fees, but what you lose is expert investment advice and guidance. If you choose to go with a do-it-yourself online trading platform, be sure to avail yourself of the services of a financial advisor and fill your knowledge base with investing basics before you get started.
