Social traders flock to low-cost stock trading platforms

Social traders flock to low-cost stock trading platforms

A rise in easy and low-cost stock trading platforms is likely to further fuel high-risk behaviour among social traders, a financial expert warns.

Senior Finance Lecturer Dr Angel Zhong observes “users of low-cost trading platforms are likely to be engaged in social trading, flagging it as "one of corporate regulator ASIC’s recent concerns.” 

Social trading refers to the exchange of stock trading ideas by retail investors in groups and discussions on social media websites such as Facebook, Twitter and Reddit. 

“Retail investors are easily influenced by unmoderated commentary on the market and investing,” Zhong explains.

She says the issue has been further fuelled by a rise in low-cost stock trading platforms; in particular the launch of Superhero, which Zhong describes as “the Australian version of Robinhood” - the popular US trading platform.

“Superhero is backed by the founders of two Buy Now Pay Later (BNPL) companies, Afterpay and Zip, the market darlings on the ASX this year,” the Senior Lecturer explains.

She points to the trading platform’s timely entry into the market, “occurring when a large surge in retail trading has been observed in Australia and around the world.”

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Compared to traditional trading platforms like Commsec that charges around $19.5 per trade, and a minimum investment of $500, Superhero charges $5 a trade, with a minimum investment of $100.

Similar low-cost platforms include Selfwealth, IG and eToro, she adds.

Pros and cons of low-cost stock trading platforms

Zhong acknowledges that “low-cost trading platforms have both pros and cons in relation to the share market and economy.

“Low-cost trading platforms are attractive to retail investors interested in making a small investment in the share market, thus likely to boost stock market participation,” she says.

“Increase in stock market participation provides liquidity to the market and facilitates the flow of funds in the capital market."

However, increased participation by retail investors who are prone to behavioral biases may also increase the probability of irrational trading and disrupt the efficiency of the market, she warns.

“With easy and low-cost trading platforms, retail investors may act on misleading information from social trading and suffer losses in a highly volatile market.

“The rise in low-cost trading platforms and the associated increase in retail investors in the share market highlights the importance of financial literacy.”

 

Story: Diana Robertson

30 September 2020

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30 September 2020

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