The rise of low-cost Fintech businesses has flowed through various areas of the Financial sectors. Some making real positive change whilst others are very questionable. Companies that can deliver the same or a better product at a cheaper price are great for consumers. But smart marketing sometimes can create an illusion of better, whilst under the cover, they are charging the same or more than other providers.
Online banks were one of the first to hit, providing cheaper options for home loans. These online banks were able to do this by having no physical shop fronts and much less staff. A consumer basically can just jump online and fill out a form, that information is then run through an algorithm to decide if they should lend money to that person or not. Positives are lower costs, negatives are when times get tough are they equipped to help you out, like in the middle of a pandemic? Overall though we have seen a lot of positive change come from this including the willingness of the Big 4 to negotiate with customers to lower rates.
Buy Now Pay Later providers were next, taking on the credit markets via small personal loans. But this time the big change came, instead of charging the borrower they took a clip of the sale. This is a great example of changing a product to help the shop owner get more sales whilst the consumer can pay the item off with no extra charge.
Online trading platforms are seeing the rise of cheap online trading and in the US, completely free brokerage. This is allowing many people that once found trading just out of reach, able to come in and buy and sell shares cheaply.
This has come with very mixed opinions. Yes, they are providing a cheaper service, that on the surface seems comparable but investors beware. There is a massive difference between a loan and the stock market. Becoming a successful Investor or trader takes education and skill. Almost anyone with a job can get a loan and pay it off.
Previously with the barrier higher, many would take their time educating themselves and creating a plan before jumping into the market. Smashing down that barrier creates the illusion that anyone can come into the market and easily turn their savings into a fortune.
These platforms are not coming with enough warnings to help lead people to buy good fundamentally strong companies that are likely to appreciate over the years. They are not teaching people to diversify. Instead many are getting advice from Facebook feeds and jumping in on small and micro-caps; large risk companies that might rise 100% in a week, but then get dumped. This has more and more everyday people buying the top of the momentum and losing half their money in a week.
BRN is a perfect example, it ran from $0.16 to $0.97 in less than a month then crashed back to $0.40 in a week. Many newbie traders bought in at above 90c and are now asking people on Facebook what to do. One particular person posted that they invested their entire $40K bank on it at $0.90…
Many investors and traders align themselves with a full-service advisor or a financial advisor to help make decisions and stay informed. But with cheap platforms making it trendy to invest many are just going it alone.
Don’t get me wrong I am an advocate for the market and believe it should be accessible to everyone. But making it this easy without providing some service, help or advice is outright negligent.
So to all you newbie traders and investors looking to enter the market, please hear this warning.
- Investing and trading is not meant to be gambling
- Markets move quicker than ever before, so timing is important
- Get educated, learn basic Technical Analysis to help to time your entry and exits from the market. Basic Fundamental knowledge will help you identify if a stock is moving on hype or if it is likely to continue in the long term
- You need a stop loss, even if you are planning to hold long term
- Never put your eggs in one basket. Aim to own a group of companies
- Doing it yourself properly takes dedication, make sure you have at least 20mins a day to look at the market.
- Most platforms don’t make money from cheap brokerage, so they are likely aiming to up-sell you into something. Some good products and some not, so be aware.
- Some platforms, especially ones that offer free brokerage are likely making money from you some other way, whether it be fees or foreign currency exchange.
- HIN is always better to protect your investment. A HIN based account means you have full ownership of your stock. If the company you are trading through goes under you can just transfer to another company.
Good luck and happy trading
Tim Michaelides is the Head Trader at Emerald Financial Group.
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