Stock trading can be addictive
- Robin Powell
- Jul 29, 2024
- 3 min read
Stock trading risks are often underestimated, especially when it’s never been easier to buy and sell shares from your phone.
In this video, former Financial Times journalist Norma Cohen discusses the dangers of fast, app-based trading and how these platforms can become addictive.
While marketed as commission-free, the reality is more complex. Platforms profit through so-called payment for order flow, which may lead to poor trade execution and most users don’t realise it.
Even professional fund managers struggle to consistently beat the market. So what chance do casual traders have?
KEY TAKEAWAYS
1. Trading apps may look harmless, but they often blur the line between investing and gambling
The ease of use and slick design of trading platforms can encourage impulsive behaviour. Some operate more like betting apps than investment tools, and regulators are starting to take notice.
2. “Commission-free” doesn’t mean cost-free, and pricing may not be transparent
Although many trading apps advertise zero brokerage fees, they often profit through payment for order flow. That means you might not get the best price on your trades, and you may not even realise it.
3. Long-term investing still beats short-term speculation
Even seasoned professionals struggle to consistently pick the right stocks. History shows that most short-term traders underperform the market over time. A diversified, long-term strategy remains the most reliable approach.
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TRANSCRIPT
Robin Powell: It has never been so easy to trade stocks. There are now all sorts of apps and websites that allow you to buy or sell in just a few moments.
But Norma Cohen, a journalist with the Financial Times for many years, says it’s a worrying development.
Norma Cohen: It can be very, very dangerous and there are some of these sites, and they're very tempting. Some of these sites are akin to gambling sites. And I think that it's not a moment too soon that regulators are starting to look at gambling and the extent to which some of these are gambling.
RP: Research has shown that many people are persuaded to trade stocks by the promise of commission-free trading.
But how these sites make their money is complicated, and, in reality, trading is very rarely free.
NC: They claim not to offer any brokerage fees, but they do their transactions through sites where you pay for order flow, and it's not clear that investors who are using these sites are necessarily getting the best price. It's very complex, and if you cannot easily understand it, then you
are best urged to avoid it.
RP: Another problem is that picking the right stocks at the right time is very difficult. Not even the professionals can do it with any consistency.
NC: How do you know what stock is going to do better than every other stock?
You know you, you think you, you might know, but even if you have all of the publicly available information, you cannot necessarily see whether a stock is fairly priced or mispriced. It's very difficult to tell. And periodically, this or that fund manager will tell you, ah, yes, I can spot those mispriced assets and I will buy them for you. And we have seen some of these fund managers spectacularly fall apart.
RP: Of course, if you want to speculate and you can afford to lose money, then trading stocks might be an option. But you shouldn’t expect to outperform.
NC: The track record suggests your odds over any period of time are Minimal to zilch, look, if you're going in for a week, you know, and you're out again and you haven't borrowed any money, maybe you've made, you know, some money, but short of if you're in it for years, over time, all of the studies of this kind of trading suggest that you will not come out any better than if you had put your money with a passive fund manager and just left it there.
RP: One final word of warning: stock trading can become addictive. For anyone with a gambling problem, it really is a bad idea.
Investing for the long term in a broadly diversified portfolio makes much
more sense.
© The Evidence-Based Investor MMXXV.
