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Investment apps targeting first-time traders 

ASIC warns rookie investors to beware the social media hype. 

online_investing_apps
Last updated: 16 November 2021
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Checked for accuracy by our qualified fact-checkers and verifiers. Find out more about fact-checking at CHOICE.

Need to know

  • Around 700,000 investors placed their first trade in 2020, many by using an investment app
  • Nearly half (49%) of the first-time investors were aged between 25 and 39, while 18% were under 25
  • Many of the apps use marketing tactics similar to gambling apps, and ASIC warns that a market correction could be costly for first-time traders 

In early 2021 the Australian Securities and Investments Commission (ASIC) issued a strong warning to first-time traders, expressing concern that many may not be aware of the risks. 

In effect, the regulator was saying don't fall for the social media hype about making a fast buck in the share markets. 

"Everyone is entitled to take risks," ASIC's executive director of markets, Greg Yanco, said at the time. 

"However, we advise first-time investors to focus on long-term goals and not make rash decisions based on a fear of missing out on market falls or gains. We also recommend learning about trading before you start or getting advice from someone you trust."

It's sound advice, and the timing was no accident. Of the approximately 1.67 million retail trading accounts that were active in 2020, about 700,000 placed their first trade that year – the year of the pandemic lockdown. 

A survey by the research firm Investment Trends conducted in March 2021 indicated that nearly half (49%) of first-time investors were aged between 25 and 39, while 18% were under 25 years old. (The Investment Trends data was based on the firm's lower estimate of 1.25 million active online traders in Australia, of which 435,000 placed their first trade in the 2020 calendar year.)

We advise first-time investors to focus on long-term goals and not make rash decisions based on a fear of missing out on market falls or gains

ASIC executive director of markets Greg Yanco

Many of these trades are executed on one of the approximately 145 investment-related apps on the Australian market at the moment. Some specialise in particular areas of investing, such as property, commodities or crowdfunding, but many give general access to the share markets just as any traditional trading and investment management firm would. 

A subset of this group focuses on particularly risky types of investing, such as Contracts for Difference (CFDs) or cryptocurrencies such as Bitcoin. 

When it comes to CFDs, ASIC has gone on record, saying simply "most retail clients lose money trading CFDs".

CFDs usually involve betting the foreign exchange rate will go a certain way, often using borrowed money, and are inherently risky. They can also be applied to changes in stock and index prices. 

But the risky trading strategies on offer from the new breed of investment platform – apps including well-established players Superhero and eToro – are just part of the problem. 

The bigger issue is first-time traders getting their advice from social media forums such as Reddit, Facebook and LinkedIn for any kind of investing, ASIC warns. 

Information and advice found on such forums "may be conflicted", ASIC says, adding that "some companies and product issuers pay promoters to post favourable comments to encourage first-time traders to invest".

In short, you just can't trust the advice. 

superhero_investment_app_logo

About 700,000 people placed their first trade in 2020 using apps such as Superhero.

Appealing to the gambler mentality 

In September this year, ASIC's Warren Day outlined a number of social media-driven tactics that can cost first-time investors – or any investor – a bunch of money. 

He also shed light on how some investing apps lure in rookie traders and keep them active on the platform. 

They are also adding in features to get you addicted to their app. Many of these are copied from the gambling industry

ASIC's Warren Day

"Companies are spending lots of money to develop easy-to-use apps and minimise the number of clicks you need to buy or sell securities," Day said. 

"They are also adding in features to get you addicted to their app. Many of these are copied from the gambling industry to get you to invest more and more often. And many of these are being targeted at young people." 

The tactics include celebrity endorsements, offers of free shares or brokerage (the execution of the actual trade), and benefits if you refer someone to the platform. The apps also regularly nudge users with pings and messages in an effort to keep them trading, which you generally shouldn't do without proper research and reliable advice. 

"Academic research has shown that the more frequently you trade, the more likely you are to mistime the market and lose money," Day said. 

A paper published in June this year by researchers at Carnegie Mellon University in the US underscores ASIC's concerns, making the case that the design of investment apps can "encourage investors to act on their instincts and possibly be less rational" and that incentives such as free stocks "may blur the lines between an investing app and one for lotteries and gambling".

Tactics to keep you investing 

Pump and dump

Promoters of an investment opportunity use social media to hype up a particular stock and spread false information about the rosy prospects of the company. The promoter then sells their shares when the stock has hit an apparent high point, leaving the other investors to take losses as the share price plummets. (This form of market manipulation is actually illegal, but that doesn't mean it doesn't happen.) 

Copy trading

Investing apps will invite you to copy the trading strategy of an ostensibly more experienced investor. The investments may be high risk, and the chance of losing money comparatively high.

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ASIC is concerned that inexperienced investors will be vulnerable to market corrections.

'Blurring of lines' 

An ASIC spokesperson told CHOICE the regulator is keeping a close eye on the rise of investment apps and their aggressive marketing strategies in Australia, saying "the blurring of lines between financial investment, speculation and gambling is a topic of academic research and is a complex area. We are actively working in this space and looking at products and trading apps being offered in Australia to understand trends and developments and consider if they are causing investor harm". 

As to whether promoting people to trade more often with pings and messages runs counter to existing legislation, the spokesperson suggested it's a grey area but said  financial licence holders are required to provide financial services "in a fair, efficient and honest manner and not engage in misleading and deceptive conduct. Licensees would need to consider if the use of pings and messages is consistent with these obligations". 

Further, an update to the Corporations Act (ASIC's legal framework) in October this year imposed new design and distribution obligations on license holders, which the spokesperson described as "a consumer-centric approach to the design and distribution of products". 

Under the new obligations, issuers and distributors of products like investment apps have to make sure they're appropriate for the needs and financial situations of the people they're marketed to and "develop and maintain effective product governance arrangements across the life cycle of financial products" to ensure this is the case. 

We are actively working in this space and looking at products and trading apps being offered in Australia to understand trends and developments and consider if they are causing investor harm

ASIC spokesperson

The spokesperson said the 50% increase in retail trading since the onset of the pandemic has been accompanied by a 50% increase in the benchmark share index (the ASX200) "which would indicate that a number of investors have had a positive experience during this period. However, there is the potential that retail investors may be taking excessive risks or investing more than they can afford to lose and in the event of a market correction we are concerned that retail investors may see significant reduction in their share values".

"ASIC is actively working to reduce retail investor losses," the spokesperson said, citing a recent product intervention order for Contracts for Difference that reduced investor losses from a quarterly average of $372 million in the year prior to the CFD order to $22 million in the year after it was issued. 

Trading with an app? Protect your money  

  • Set limits on how much you put into your investment account and how often you trade.
  • Turn off the app's automatic notifications – only engage when you're well-informed and ready. 
  • If investing starts to feel like gambling and you're finding it hard to stop, contact a gambling support service such as gambling help online or call National Gambling Helpline on 1800 858 858.

Looking to start investing? Proceed with caution 

ASIC's Moneysmart website offers a good guideline

Have you had a bad experience with an investment app? Get in touch: akollmorgen@choice.com.au 

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