The Arizona Corporation Commission is warning novice investors about the risks of self-directed, smartphone investing apps.
While “do-it-yourself” investing apps often provide cost-effective, convenience with instant access to trading at an investor’s fingertips, some are presented like a video game that attract young investors who are not made aware of the risk of financial loss. This “gamification” of investing encourages unsophisticated investors to take risks they don’t understand. Recently these apps are marketing on college campuses and other locations designed to reach new investors. These apps can be habit-forming, and investors can get in over their heads quickly. These ramifications can be costly.
Investing apps are easy to download and easy to use. The game-like nature of the apps is appealing to young investors. Some investing apps use text messaging and flashy notifications of “hot stocks” that entice inexperienced investors to buy and sell on emotion and not on objective information. Instead of building a portfolio that is aligned with specific investment objectives, time frame and risk tolerance, some newer investors buy on impulse where investors end up with a portfolio that does not match their needs.
Because of the game-like nature of the apps, unsophisticated investors are encouraged to invest in risky investments by trading more frequently and faster than is prudent. Sometimes, holding on to investments for a long time can earn more money than quickly buying and selling. Some apps are structured in a way that make tracking a portfolio difficult, which sometimes leads an inexperienced investor to a very risky portfolio.
Young, unsophisticated investors may be at risk of taking on day trading or investing in meme stocks and cryptocurrencies to their detriment. Nothing is wrong with using these apps if done responsibly from the start. Understand that the apps are not games but a way to save for your financial future. Educate yourself on how the apps work and the trading that the investor is doing. Watch not only what you are earning but also what you are losing. Set limits on what you can afford to lose.
Although investing apps may try to determine an investors’ risk tolerance with a questionnaire and an algorithm, a major concern is that some investing smartphone applications are not providing sufficient information to allow investors to make knowledgeable choices.
Before using an investing app, the Corporation Commission’s Securities Division recommends reflecting on these questions:
- Does the investing app encourage the investor to build a portfolio based on financial goals while considering a certain level of risk tolerance? Risk only the money you can afford to lose. When you invest, you should always keep track of your investments and ensure your portfolio meets your long- and short-term needs. Invest prudently.
- Are you comfortable with the level of cyber and data security? Read the terms of service and understand how the company will protect your financial data. With any online application, there’s a risk of being hacked. The investing app should never ask an investor to disclose personal information or credentials in an email. Check consumer reviews and internet searches for information about protection of data.
- What is the app’s customer service policy? If you have an issue with your account or the app, you’ll want to be sure that you have access to the company, particularly during busy times. Often it takes access to a person who can help you fix the problem. Some investing apps only offer automated responses that may not be useful in resolving an issue. Be sure you are comfortable with the level of service the app provides and read customer reviews.
- Does the investing app provide information on the risks of margin trading before granting access to borrowed funds to invest? Margin loans increase an investor’s level of market risk since the amount of financial loss is not limited to the amount of an investment portfolio when the price of investment declines and payment on the loan is required.
- Does the app use hype and animation to push a certain investment? Resist the pressure created by social media, chat platforms, and buy/sell indicators influenced by online chatter and anonymous sources who insist they know best. Research and understand the investment products you are considering before you invest. Do a search about the company and management and check with regulators for any potential disciplinary history.
To ask and check before you invest, contact the Investigator on Duty at 602-542-0662 or by email at SecuritiesDiv@azcc.gov. To learn more about online investing platforms and the risks of various investment products, visit the Investor Resource section of https://azcc.gov/