Trading apps, benefit or danger? (debate) – Belgium

Between a healthy popularization of investments among young people and the risk of gamification.

Johan Corthouts (FSMA): “Trading apps are in tune with the digital world of young people.”

Some stock exchanges and trading apps are pushing for longer trading hours. The Deutsche Börse has already increased the possibility of trading German stocks by two hours. That of Tokyo will extend its session by half an hour. For Johan Corthouts, of the FSMA, this is not necessarily a good thing. More and more traditional exchanges and trading platforms want to increase the duration of the sessions. Is this a good idea for the investment world? Do we talk about it in Belgium too? Extending the open time will normally have the effect of decreasing liquidity, so it is not a good thing except, possibly, for large caps. If we extend the sessions, it will be more difficult to follow the markets, except for large teams. Is it desirable? Moreover, extending the schedules would not at all help issuers who have to publish sensitive information or react to possible leaks. This would risk undermining the transparency and proper functioning of the markets by eliminating the closing periods which allow for calm communication. Is it the enthusiasm of individuals for trading – which has increased sharply since the Covid and the confinements – which encourages these longer hours? In my opinion, no. The issue of longer trading hours resurfaces regularly. Slightly extending the opening hours, from 8 a.m. to 6 p.m. for example, would not change much. But keeping the Stock Exchange open until midnight or later is really undesirable. A prolonged opening could lead to a dilution of the number of orders. We would then see the spread (Editor’s note: the difference) between the bid price and the ask price increase, which would inevitably have the effect of increasing volatility. Investors would also find it much more difficult to follow the market if it remained open longer. What would happen if a stock price were to suddenly crash at 11 p.m.? Could they then still react in time? Does the fact that the crypto market operates around the clock also push the exchanges in the direction of a longer open? The Robinhood site ultimately recommends 24-hour trading. Is it possible for stock markets to go that far? Keeping the market open at all hours wouldn’t make much sense. When should companies release their numbers if the stock market remained open 24 hours a day? A permanent opening would also greatly increase the risk of manipulative behavior during off-peak hours, when the market would be less reactive. It would then be easier to manipulate a price by disseminating misleading information or employing other techniques. Are trading apps appealing to more and more young people? The arrival of trading applications has undoubtedly helped young people to take the plunge and invest in the stock market. These applications are in tune with the digital universe of young people. We have noted that, since the start of the health crisis, they have shown a growing and lasting interest in the stock market. With the lockdown, they had more time to take a closer look at the equity market and the stock market crash in March 2020 created buying opportunities. Trading applications have also made it easier for them to access the stock market. Good news for stock markets and equity investments? Buying shares means contributing to the financing of the real economy. This is better than buying cryptocurrencies. In addition, stock market transactions are subject to a regulatory framework, with strict rules to limit insider trading and penalize market manipulation. It is clear that it is positive that young people are interested in investing in shares if they see it as a tool for investing savings and not as a “casino”. Our recent study of young stock market investors also shows that young people hold on to their stocks longer than older investors. Financial education in this context is very useful. Should you be wary of these apps, especially when they advertise zero transaction fees? It is correct that some apps do not charge transaction, brokerage or other fees. But nothing is free. Investors should be aware of the fact that trading apps are remunerated in another way and that they pay indirectly for the transactions they carry out through these apps. What advice can the FSMA give to young investors attracted by trading apps? Trading applications use push notifications (Editor’s note: alert messages) to encourage investors to buy and sell in a hurry. Beware. It is important that young people take the time before deciding to invest and that they always aim for the long term. To properly manage your portfolio, you must also spread your investments over several sufficiently diversified financial instruments. Investing is not a game. Young people should be careful not to get carried away by the performance and recommendations of other investors. Some messages posted on Internet forums are only advertisements, or even forms of manipulation. The FSMA has published a list of fraudulent trading platforms. So should we be careful? Obviously. In this case, we are not dealing with trading applications or platforms from banks or approved brokerage firms. The platforms against which the FSMA issues warnings are involved in scams, are not authorized or offer prohibited investments in our country. They often post fake advertisements on social media or mobile apps. As soon as a consumer clicks on this ad and leaves their contact details, someone calls them with a very attractive investment offer. It is then a question of not forgetting the saying: what is too good to be true often is not. Trading apps? Why not, if it’s to have fun and discover the world of investments, according to Nicolas Claeys, of Test Achats invest. But then without risk, with small amounts. Who are the new investors or stockbrokers who go through trading applications in particular? The proportion of young people who invest has increased in recent years, certainly since the first confinement, in 2020. They are not all stockbrokers. But we can imagine that young people use their smartphone more easily to invest. At the same time, we are witnessing the development of trading applications that try to seduce them. This does not only concern the stock markets, but also the cryptocurrencies for which one can also invest on the weekend. There are few trading applications in Belgium, but this is developing gradually. There are more in France and the Netherlands. Should these applications be trusted? It’s necessary to be vigilant. The business model of applications such as the well-known Robinhood, in the United States, is to ensure that there are as many transactions as possible, sometimes presenting stock market investment as a game. example, when placing an order. You can share your wallet with other Internet users, who can copy it. The SEC, the policeman of the American Stock Exchange, criticizes companies like Robinhood for this extreme “gamification”. Some of these applications also offer to buy fractions of shares when these are too expensive. Everything is done to encourage transactions. Isn’t this likely to cause addiction, as with online games? Inevitably, part of the population is more vulnerable, whether for gambling or for alcohol. But this does not concern a majority, far from it. Most investors remain fairly reasonable. Now, it is a possible drift, especially when it is claimed, on social networks or on YouTube videos of so-called professional investors, that anyone can become very rich by investing in the stock market. But that’s why trading apps are regulated, rather strictly in Europe. Isn’t it profitable to multiply transactions? What most studies on the subject show is that the more transactions you make, the less efficient your portfolio is. Market timing, consisting of spotting shares when they are at their lowest and selling them when they are at their highest, is very complicated. Therefore, if we multiply the transactions, it is not necessarily a winner. When investing in the stock market, it is preferable to have a strategy focused on the long term and in diversified products. Betting everything on the same horse, however strong, always involves a risk, as we saw in 2008 with Fortis, which nevertheless seemed very solid. Diversification does not make it possible to avoid fluctuations but it protects against excessive ones. Patience is an asset because, in the long term, the rises tend to offset the declines and a diversified portfolio made up of stocks and bonds can then offer a good return. Investing only in stocks via an application is therefore not a good idea? Why not if it allows you to have fun and discover finance and the world of investments. But this should not be, in my opinion, the main portfolio strategy. It is better to bet small amounts to reduce the risk. Especially when you start trading. We always make mistakes. Even professionals do it. In this context, is extending stock exchange hours a good idea? I don’t see much point. Some will say that during the day, they don’t have time and that leaving the stock exchanges open later is better. But, once again, this is a false need. What is the point of watching a stock, following its price hour after hour, to buy or sell it at any time, even in the evening? We enter the game of short-term speculation and no one can predict short-term movements. On the other hand, it is easier to predict that in five or ten years the level of the Bel20 and stock markets in general will be higher than today. Obviously, there may be economic and climatic crises, wars. It’s never guaranteed. But patience is often more beneficial. In any case, this is the strategy we recommend at Test Achat invest.

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