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Democratization Of The Stock Market

September 02, 2020

At one time, pensions and wealthy individuals were the holders of stocks. The effort to make stocks available to anyone who wants to invest has been a process going on for decades. It is called democratization of the financial markets. The creation of discount brokers, 401k plans, IRAs, mutual funds, exchange traded funds, etc. contributed to making investing available to much of the population.

Enter robo-advisors. Anyone could go online, based on some criteria select a model portfolio, and for a fee, the robo-advisor would execute all the trades and reporting.

October 2019 saw Charles Schwab & Co. eliminate the fee to buy stocks and ETFs. Another step in the democratization of investing: you could buy/sell stocks and ETFs for no charge. Previously, paying for each transaction might preclude someone from actively trading relative to the amount of money they had to invest. Although nothing is really free (see our blog article from August 12, 2020) the compensation for these types of firms are hidden.

There is a company called Robinhood. They have taken democratization a step further. They created an app for your phone that looks like a video game. There are others, but Robinhood has the largest market share. This app appeals to a lot of younger investors. Investing appears simple and affordable. But, while the process for trading maybe simple, what you need to know to make effective trades still requires learning.

These firms have tutorials but how much you learn is questionable. Beyond the video gaming crowd are the sports gamblers who, until recently, haven’t had a lot to gamble on. Many moved over to the Robinhood type of app.

Unfortunately, the ramifications of not knowing what you are doing can be significant. In an extreme example, one person committed suicide thinking he had a $750,000 debt but misinterpreted the statement.

While we certainly support the idea of having the markets available to people who want to invest, it’s almost like there needs to be a warning: Caution, investing without knowledge (as opposed to information) can be dangerous to your financial health.

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