Smartphones have changed the way we do many of our day-to-day tasks including listening to music, purchasing goods and services, and doing our banking.
Today, mobile smartphones and the applications – or apps – that run on them also allow us to review our stock portfolios, track investment performance and even trade in stocks, bonds, exchange-traded funds (ETFs), cryptocurrencies and the like.
Why Trading Apps May Appeal to Investors
Many of these smartphone stock trading apps are offered by the banks, independent discount brokers and investment dealers that are well known to Canadians. Apps from stand-alone mobile and online trading services have also appeared, leveraging ease of use, low or no trading commissions, no minimum investments, and user incentives – such as free shares – to attract business.
These mobile stock trading apps might deliver on their promise of convenience and no or lower fees (think $6.95 to $9.95 per trade), but their use comes with potential complications and risks for the fast-growing number of do-it-yourself investors. Investors need to be aware of these potential risks to best ensure their experience with mobile apps is positive, secure and supports their financial planning goals.
A Short, Sometimes Volatile History of Stock Trading Apps
Investors initially associated mobile investing with well-known stock trading apps provided by U.S. companies.
However, U.S.-based mobile apps are only licensed to sell securities in the United States and are not available to Canadian investors. In recent years, Canada has witnessed the growth of its own mobile stock trading app sector. A wide array of investment apps offered by start-ups to banks, financial services firms and independent brokers are now available to Canadian investors.
Pay Attention, From the Beginning
Downloading and signing up for mobile trading apps can be simple, and users can be ready to trade in relatively short order. Users download the apps from popular apps stores. Sign-up may include face identification, passwords and preferred types of accounts (such as a non-registered investment, RRSP, TFSA or cryptocurrency account), in addition to personal information including address, birth date, employment status and social insurance number.
The full sign-up process also includes client review of information related to their new trading accounts. The temptation is to skip this lengthy ‘fine print’, check the boxes and start trading as soon as possible. But investors should fully consider and evaluate all the information provided, as it is important and can relate to:
- your legal obligations;
- the type of investment, tax and legal advice the app provider will offer (it can be none);
- potential issues related to how trades are executed and delays in security pricing;
- risks that come with using mobile trading apps, and;
- potential fees such as those related to currency conversion.
“Free” Investing Services Can Come at a Cost
Some mobile trading apps provide free trading services in investment products such as stocks, options and ETFs, along with cryptocurrencies. The trade-off? Investors using these mobile apps are often on their own when it comes to financial planning and selecting stocks and other investments for purchase. Many mobile stock trading apps now offer information on investment products and investing basics within the apps themselves and on their websites and online trading platforms. However, novice investors, uncertain about which investments to buy and the risks involved, may well require more support to ensure they are buying appropriate investments to reach their short and long-term financial goals.
There are options for investors who would like their apps and their related online offerings to provide more advice. Some stock trading apps and their websites offer robo-advisory services that recommend lower cost portfolios of ETFs designed to fit different risk profiles and investment strategies (for instance, socially responsible investments). Investors can expect to pay fees and management expenses based on the percent of the assets held in the account, in addition to the management expenses charged by any ETFs held in the portfolio.
Meanwhile, experienced self-directed investors may appreciate the analytics tools offered by some app providers to help them select appropriate investments.
Marketing for certain low and no-cost trading apps and online services may link lower fees to higher returns. However, sound, professional investment advice focused on the investor’s financial goals and best interests can provide value to an investor who struggles to manage their own investment account because of lack of knowledge or time.
How Commission-free Trading Apps Providers Make Money
No and low trading fees are compelling features for some users of trading apps. But the question arises: If investment dealers do not charge for trading, how are they making money? It turns out, in many ways.
No fee trading apps may charge currency exchange fees and earn interest on cash sitting in client trading accounts, and receive payment for order flow (PFOF).
Currently, PFOF is contrary to New-Self Regulatory Organization of Canada (SRO) rules. There are no Canadian dealers that use this method of revenue generation.
Security of Investment Apps Should Be Top of Mind
As with any smartphone app, the security of stock trading apps is a key consideration for users. Investors can take the following steps to help protect their data and personal information:
- Use two factor authentication and complex passwords with a mix of letters, numbers and symbols
- Protect login credentials, and log in with fingerprints or face identification
- Do not use public networks or freely available networks to trade, as they can be tapped to obtain login or trade details
- Install anti-malware or antivirus protection
Importantly, ensure the stock trading application selected is registered in Canada, regulated by the New SRO and a member of the Canadian Investor Protection Fund (CIPF), which provides some protection for investors in the event a member firm becomes insolvent.
Many well-known stock trading apps in Canada, including those offered by banks, independent discount brokers and other financial services firms, meet this standard.
Trading Apps are Not a Game
Some mobile trading apps have integrated game design features such as bursts of confetti, animations and other prompts that celebrate trades and investments. While “gamification” of mobile trading apps is more common in the United States, elements – such as free stock bonuses to onboard new investors – are finding their way onto Canadian apps.
A recent Canadian study found that investors using ‘gamified’ mobile trading apps took more risk and traded more casually than when completing their buys and sells through their desktop computers. Meanwhile, an American study revealed that trading apps encourage people to chase past returns, buying assets that may already be near the top of the market.
In other words, investors should monitor their trading to ensure they are taking on appropriate risk, taking the necessary time to think through their investments, and trading with their financial planning goals top-of-mind, regardless of the trading platform they use. Rushing into investments or feeling pressured to invest could be signs of investment fraud. Learn more about the fraud warning signs.
Additional Considerations When Using Trading Apps
In just the past few years, we have seen stock trading apps grow from simple, bare bones services to platforms integrating mobile and online services that connect users’ bank accounts to trading accounts and can provide self-directed investors with investment information, investing advice, analytical tools and suggestions for portfolio construction.
Their low or no fees, convenience and ease of use can make mobile stock trading apps a useful tool for investors who recognize their benefits and limitations. Many online sites compare the stock trading apps available in Canada today, the services they offer and the fees they charge.
It’s up to Canadian investors to review their options and, if they are still interested in stock trading apps, align the services they require and prices they are willing to pay to select a trusted trading app that best meets their needs.
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using the BCSC’s online complaint form.
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