We have all long been awaiting better access to valuable stock options, and happily, that day is upon us. Recent FinTech platforms are making access to purchasing stocks more democratic. They are doing with zero commissions, and by offering fractional trades for both traditional assets as well as cryptocurrency.
Along with filling the need for safe and effective digital currencies, cryptocurrencies have resulted in a new asset class, which means a new way to personal wealth. The accessibility of cryptocurrency and top stock options is great news for new investors. Getting a portfolio started has not always been that easy.
Case in point
For example, Top 5 stocks, like Amazon, Disney, and Microsoft are totally inaccessible to those just starting a portfolio. If you only have a few hundred dollars to invest and are not part of a major brokerage, it is unlikely you will be able to afford the buy-in price.
But now with platforms like eToro and Robinhood, investors can also make fractional purchases. This strategy gives investors access to valuable stock because instead of buying shares, investors can now buy fractions of the dollar value.
Cryptocurrencies, such as Bitcoin, were originally designed to be used primarily for exchanges and transactions. However, they are more often held as a digital asset rather than used for exchange. Cryptocurrencies are also not usually backed by other assets. That means that while cryptocurrencies have accrued value, they are valued differently than traditional assets. And that is a good thing in many cases.
This is where social trading helps a lot!
Social trading uses sentiment-based information from tweets and social platforms. The data helps to track the supply and demand of certain currencies and assets. So social trading platforms such as HedgeTrade offer these data insights to a global market of traders. Access to this information offers cryptocurrency investors strategies and necessary intel that was previously only available to traders who were part of hedge funds.
Let’s take a closer look at how free trading apps like eToro help with the democratization of stocks.
As I mentioned, one way that FinTech is changing the ways to invest and build a portfolio is through social trading, which is how HedgeTrade’s analytics operates. Other trading platforms such as eToro and Robinhood operate by offering low-cost buy-ins. eToro’s buy-in is $2000 in the US, but there is no precise minimum for Robinhood.
Instead, these apps make their money through transactions and other order services. They also do not have large buy-in costs. So they’re able to attract a wide audience of users, which then becomes profitable.
Another way free apps are democratizing stocks is by offering quality market analytics.
How are cryptocurrencies valued?
Cryptocurrency assets are without typical valuation metrics. That’s because they do not operate like traditional assets, which are backed by a commodity that brings them value. Instead, cryptocurrencies have speculative value based on supply and demand. In some cases, the performance of the company supplying the tokens/currency.
This is where social trading becomes an important, albeit, an imperfect instrument for analytics.
But it is important to remember that there are no perfect measurements for performance analytics. So it is always important to behave intelligently when investing, and look under the hood of any tool you are being sold to improve your investment strategies.
So, keep reading.
Intel from Tweets
A trading platform such as eToro uses what is called a sentiment-based portfolio. The portfolio relies on artificial intelligence to analyze Twitter’s content. What the machines look for is the most recent positive or negative perceptions of digital assets.
By partnering with The TIE-LongOnly CopyPortfolio, eToro’s retail investors now have access to cryptocurrency data analytics. The analytics aggregate information from 850 million daily tweets through a partnership with Social Market Analytics.
Based on their analytics, the TIE, reports that about 50,000 tweets on cryptocurrency are made each day from non-bot accounts and about half of those are about Bitcoin.
Josh Frank, the chief executive officer of The TIE states:
“We found that crypto is an asset class that is void of valuation metrics. With crypto, the only thing that really moves it is supply and demand, so we set out to develop sophisticated solutions for hedge funds to help value and trade the asset class.”
So, the AI scans tweets, looking for relevant content. Once found, the tweet is assigned a sentiment score. This is done with machine learning and natural language processing technology.
Guy Hirsch, U.S. Managing Director of eToro says:
“The end result is that retail investors will have the chance to invest using a strategy that was previously only available to hedge funds.”
There are obviously limitations to analytics that rely on such speculative data. One such concern is that it is possible to use the design of Twitter to use influencers to manipulate the prices of cryptocurrency. That is, if the value is based on what people are saying about it, then the performance of the cryptocurrency will mean less than the sentiments that the AI gets from Twitter.
Moreover, this kind of sentiment-based data opens the field up to manipulation through Twitter’s influences, however. Nevertheless, so long as it is not the only analytic an investor uses, social trading is an excellent strategy to add to one’s arsenal.
Another way that products like eToro are proving their value with social trading is that traders are able to mimic the strategies of the most successful traders. Therefore, with minimal direction, a new investor can follow the suggestions of the more savvy trader.
Again, this is not any kind of guarantee and even has the potential to mislead a novice trader, with little personal direction. One of the reasons platforms are offering such low buy-ins is that there is little to no customer service, and no one-on-one advice.
Changing the playbook
Applications like eToro and Robinhood are not just creating a new space for investors to grow their money, but they are also proving to be real competition for traditional brokerage firms.
Brokerage firms have responded by reducing and even eliminating commissions in some cases. This is the case for firms such as TD Ameritrade, Schwab, AllyInvest, and E*Trade. They have also opened up to trading in fractional shares. In an effort to get more business, firms nor offer discounted rates on Amazon and Google shares in order to compete with the growing FinTech market.
For those with less to invest, fractional trading is a great way to get into the game. Fractional trading makes it possible for investors to buy and sell smaller portions of stocks or ETFs. This practice is also beneficial for the group of investors that wants to test a market before going overboard.
Previously, fractional trading was mostly for mutual funds, but it has since become more accessible for individual traders.
The OG Free Trading App: Robinhood
The free trading app Robinhood started the trend for commission-free investing, and the move towards the democratization of stocks. Robinhood has since started trading several major cryptocurrencies as well.
Robinhood clearly filled an important niche in the traditional market; not everyone has a wack of cash when they get started on their investment portfolio.
This trading app was one of the first to make it possible to buy fractional shares of Berkshire Hathaway’s Class A shares, Amazon, Booking Holdings, as well as other top shares. This means that you can buy dollars or cents worth of valuable shares.
However, the basic app is very simple and only allows you to buy or sell stocks at this time. (The web application has a Robinhood/crypto domain for crypto traders in most US states, but they have separate terms.) With the basic app, you cannot short sell or trade mutual funds. Robinhood options and fixed income instruments are also not available on the app. There is a reason that this is a no-fees app.
But, as I mentioned, strategies from free trading apps, such as Robinhood, has forced brokerage firms to change their old, exclusive ways. Now, commissions and large buy-ins are essentially becoming a thing of the past.
More From FinTech
Since these trading apps and cryptocurrencies have shaken the way investments are typically made, others have jumped on the bandwagon with their own take on the democratization of stocks.
Other FinTech startups are SoFi and Stash. And in October of 2019, Charles Schwab also made moves to sell fractional stocks.
SoFi launched fractional trading in July 2019. Since then the demand for expensive stocks like Amazon and Alphabet has increased by over 70% of SoFi Invest first began to offer fractional trading.
Offers access varies depending on the product, with many apps offering around 50 different stocks and exchange-traded funds. SoFi though only offers access to only about 50 stocks and ETFs.
Other apps such as Chicago-based M1 Finance, an early adopter of fractional trading in 2016, have become the biggest name in the space. They currently average around 250,000 customer transactions per day.
When Satoshi Nakamoto created Bitcoin, it was the first instance of successful digital cash. And despite all of its detractors, Bitcoin and cryptocurrency have expanded far beyond the bounds of the seedy dark web; a global economy needs secure digital assets.
Cryptocurrency is not only a test of what blockchain technology has to offer, but it is also a call for a more democratic digital free-market. Back when Bitcoin got going in 2008, the non-fiat currency was a response to the irresponsibility of the top holders of wealth in the United States. And to the Federal Reserve’s decision to pay off the debts of the uber-rich in the mortgage crisis of 08.
The free-market was meant to be for everyone. But over time wealth becomes saturated, and it demonstrates its limitations through elite practices. This is when the market needs a game-changer. The bottom line is, it is hard to raise capital if you don’t have any capital to start with. And that is why we are seeing so many alternatives to traditional investment behavior, including cryptocurrency and trading apps.
Getting that piece of the pie
However, no one who is alert to our current political climate believes that democracy is perfect. But one of the greatest boons of democratic values is believing that everyone deserves an opportunity to grab at a piece of the pie.
One of the easiest ways to do create access to top assets is through fractional sales. However, these are not profitable sales for traditional financial advisors. That is why apps that take out the middleman are great for those with modest capital to invest.
However, access to the market is not enough. Investors need quality analytics to know where to put their money. This is especially true with apps, given that you do not have an advisor holding your hand and doing the research for you. This is where social trading analytics offer crypto-investors a leg up.
Now, using a number of investment apps, smaller investments in the top five stocks such as Amazon, Apple, Tesla, Microsoft, and Disney are possible. But these investors are buying in dollar amounts, rather than shares.
Since the inception of Bitcoin, even cryptocurrency markets have become dominated by big investors. Whales can dominate the markets, which means that trading apps that make more room for smaller investors have become a must.
Apps that offer low buy-ins and quality analytics make access for small investors a reality. There are obviously going to be limitations to each app, and you are not getting full service here. But there is little risk with low buy-ins.
Free trading apps give new investors an opportunity to use social trading to their advantage and to get their feet wet in a new asset class, without suffering major losses.