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The pros and cons of DIY investing
“Social trading” is being flagged as a very real issue now affecting the Australian stock market – especially as low-cost stock trade platforms gain popularity.
The pros and cons of DIY investing
“Social trading” is being flagged as a very real issue now affecting the Australian stock market – especially as low-cost stock trade platforms gain popularity.
Angel Zhong, a senior lecturer in finance at RMIT University’s school of economics, finance and marketing, has said that the advent of low-cost stock trading platforms has resulted in the worrying increase in “social trading”.
Flagging it as “one of ASIC’s recent concerns”, Ms Zhong explained that social trading refers to the exchange of stock trading ideas in groups and discussions on social media platforms like Facebook, Twitter and Reddit.
“Retail investors are easily influenced by unmoderated commentary on the market and investing,” she commented.
“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.”
According to Ms Zhong, it highlights the importance of greater financial literacy as investors move to a do-it-yourself style of investing.
The senior lecturer acknowledged that social trading has become more prevalent as a result of a “rise in low-cost stock trading platforms”.
She cited the Australian version of Robinhood – known as Superhero – as the most recent example, which is backed by the founders of Afterpay and Zip, which Ms Zhong referred to as “the market darlings on the ASX this year”.
“Superhero’s entry into the market was timely, occurring when a large surge in retail trading has been observed in Australia and around the world.”
Compared with traditional trading platforms such as Commsec, which charges around $19.50 per trade, Superhero charges just $5 for the privilege, Ms Zhong stated.
Other low-cost platforms available to investors include Selfwealth, IG and eToro.
From the lecturer’s perspective, low-cost trading platforms come with a number of pros and cons.
She highlighted that such platforms are attractive to retail investors interested in making a small investment in the sharemarket and are likely to boost stock market participation.
On one hand, an increase in stock market participation provides liquidity to the market and facilitates the flow of funds in the capital market.
But Ms Zhong was quick to point out how “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”.
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