Finder’s Investing Report 2021 discusses how share trading apps revolutionised investing

Access the Finder Investing Report 2021 here.

Micro-investing and other share trading apps are growing in popularity in Australia, but could they be making us riskier investors?

The share market can be daunting. For those outside the finance industry, it can be challenging to decipher what stocks to choose, what price to pay, what platform to use and how to get started. With a minefield of information to navigate and dozens of decisions to make, it's no wonder that nearly half of Australians (47%) aren't investing in shares.

So what's stopping them? Finder research found some of the barriers preventing people from entering the share market include not being able to afford it (15%), perceptions of investing being high risk (12%), and not knowing how to invest (9%). For younger generations, the perceived difficulty is even higher: Nearly one in five generation Z Australians (18%) won't enter the share market because they don't know how.

But times have changed and what was once a complex and time-consuming process has become easier and more accessible with the emergence of micro-investing and other share trading apps.

Micro-investing takes the thinking out of investing

Micro-investing involves consistently investing small amounts of money over a long period of time, allowing small-scale investors to enter the share market without large amounts of cash. Apps such as Raiz Invest (previously Acorns) and Spaceship Voyager have driven immense growth in this market, particularly among younger generations who may lack sufficient savings to enter the traditional share market.

Between 2016 and 2020 Raiz Invest grew by a factor of 24, now holding $464 million in investor assets. Spaceship Voyager experienced even more explosive growth, from $6 million to $112 million between 2018 and 2020. If these two major players can be used as a proxy for the micro-investing market, there is evidently a major opportunity.

Micro-investors can choose to invest small amounts periodically into a selection of diversified portfolios, rather than a large sum of money at once. Some apps also allow consumers to round-up spare change into their investment account. For example, a coffee costing $3.50 is rounded up to $4, with the extra 50 cents put into the investment account.

Aside from being budget-friendly and lowering barriers to entry, micro-investing can help investors take advantage of dollar-cost averaging, an investment strategy that involves purchasing shares in smaller quantities over a period of time in order to "smooth out" the impacts of price fluctuations on returns, and minimise the risks caused by market volatility.

Fractional trading makes blue-chip share trading more accessible

As a subset of micro-investing, fractional trading allows users to invest in fractions of shares instead of whole shares, allowing low-budget investors to buy portions of stocks they otherwise would not be able to access. For example, the price of one Amazon stock is currently $3,182, a prohibitive cost for many young part-time investors. But if those investors were able to purchase one-hundredth of a share, they would pay just $32.

Many fractional trading apps also allow users to simply choose their desired investment amount, without needing to calculate the number of shares or fractions. Raiz and Spaceship Voyager are passive forms of fractional trading, as users' spare change is invested into dedicated diversified portfolios. While more active forms of fractional trading, like purchasing one-hundredth of an Amazon share, have yet to take off in Australia like they have in the US, there are apps that allow Australians to trade US stocks in fractions, including eToro and Stake.

Millennials are leading the micro-investing craze

Millennials are worse off than their parents when it comes to student debt and property ownership, and are now bearing the brunt of the economic recession. For the generation that has been criticised for choosing smashed avocado over superannuation, micro-investing apps help to reignite a culture of savings without making consumers feel like they are missing out on anything.

In particular, micro-investing has become popular amongst younger generations simply because they have less money to spare. According to a Finder survey, 28% of millennials and 27% of generation Z Australians have said they have or would invest in shares because of how accessible it has become through mobile apps, compared with just 4% of baby boomers.

The emergence of digital investment platforms has also made financial management more accessible to a population that is increasingly addicted to screens. According to Google Insights, smartphone users have an average of 2.5 finance apps downloaded on their phone, and nearly three-quarters of users (73%) regularly use an app to manage their finances. As consumers increasingly turn to their phones to manage their money, the market for micro-investing is flourishing.

But share trading apps can be risky business

While it may sound like the digitisation of share trading has created a win-win situation for all, research from the National Bureau of Economic Research in the US suggests that trading shares on a smartphone results in riskier trading behaviour, causing investors to chase higher volatility assets and buy stocks that have already surpassed their peak. Concerningly, the study suggests this behaviour subsists even when investors return to non-smartphone investing platforms.

Part of the reason why investing apps can induce lottery-style behaviour comes down to peer pressure. A digital web now connects online investors through social media channels and Reddit forums, and supports the proliferation of radical short-term trends (like the GameStop frenzy which saw herds of Reddit users drive GameStop's share price from US$39 to US$348 in just one week) as well as encouraging imitative behaviour. Trading platform eToro, for example, has a social trading feature that lets users copy the investments of top traders.

Another explanation comes from the design. Experts suggest that apps' intuitive interfaces can be addictive – the average user of Robinhood, a US-based micro-investing platform, checks the app ten times a day – and can lead to impulsive trading. Compounding the impact of social influence and addictive interfaces are trading tools that encourage speculative or misinformed behaviour, such as "call" options, which can generate extremely high returns but are also very high risk.

The key takeaway

With the global stock market now at our fingertips, owning shares has become easier and cheaper than ever. Instead of waiting years to save the minimum capital investment needed to enter the share market, micro-investing platforms help users to keep time on their side and take advantage of compound interest from a younger age. Much like investing in an ETF, micro-investing apps allow prospective investors to choose from a selection of diversified portfolios to suit their risk profile.

But it's important to remember that digital share trading retains all of the risks of traditional trading and then some. The ability to trade whenever and wherever and the influence of social media can result in riskier behaviour, and it's clear the line between investing and gambling is becoming increasingly blurred. While stock trends will come and go, the most important thing is for investors to remember their long-term goals, learn to tune out external pressures and know that if it seems too good to be true, it probably is.

Access the Finder Investing Report 2021 here.

Finder's Insights Blog examines issues affecting the Australian consumer. It appears regularly on finder.com.au.

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