Investing has always seemed to be somewhat of a mystery to the average person. However, this is quickly changing. In one way or another, nearly all Canadians have had some exposure to the capital markets, whether it be through the Canadian Pension Plan, their retirement account, or their deposits at the bank. Eventually, all this money is used as capital to support businesses who need it, and today, one’s exposure to capital markets is becoming increasingly direct. Through new and innovative services which have been labelled as financial technology, or ‘fintech’, investing has become increasingly accessible to the average person.
The fintech industry uses new technology to accommodate and improve the financial services industry. Famous examples like Robinhood, Wealthsimple, Investors Edge, Scotia iTrade and many more have all brought investing to the mainstream. These services are essentially brokers for financial products, such as equities and debt products, which many retail investors use to grow their savings.
Robinhood’s mission statement is “to democratize finance for all.” These services have become popular due their low prices (and often, zero commissions), their convenient access to trading, and the ability to buy fractional shares – that is, a part of a share for investors who do not have enough money to buy a share in its entirety.
While these fintech firms appear to be beneficial by offering cheaper and more options for investing, the consequences have been dire. Notably, these services provide investors with potentially little experience in the ability to assess whether they should risk their savings on complex financial products. For example, Robinhood allows users to trade in options and futures with opening the app on their phone as the only barrier.
Consequently, there have been many cases where retail investors have exposed themselves to financial trouble. For instance, in 2019, Hertz filed for bankruptcy which sent their share price plummeting. Whereas established traders stayed away from the shares, retail investors came in large numbers to purchase shares of the insolvent firm after seeing its share price at a record low. We have seen the same pattern with the trading of other troubled firms, including Kodak and various airlines.
This problem is a serious one. Young and inexperienced traders may not even know what a stock price is and what it represents, and yet fintech firms are increasingly providing access to complicated financial products. While the saying that Wall Street wants laypersons to think that investing is more complicated than it is may ring true, that does not mean that the underlying basics of investing are not already complex themselves. All in all, the gist of the issue is that fintech services are bringing record numbers of retail investors to the capital markets to their potential detriment. This is a tremendous responsibility that needs to be taken seriously.