Fintech, which is short for financial technology, is a new sector that focuses on disrupting the financial industry by offering consumer-friendlier and more efficient financial products and services at a lower cost by leveraging innovative new technologies.
Currently, fintech startups are changing the status quo in a wide range of areas within the financial industry ranging from international money transfers, wealth management, and small business lending to insurance, mobile payments and much more.
An area that has also experienced disruption by fintech startups is online trading for private investors. In this article, you will be introduced to the three ways financial technology has disrupted online trading and how it has managed to simplify trading for the everyday user.
Social Trading
One of the newest innovations in the retail trading and investing space is so-called “social trading”. Social trading, also commonly known as copy trading, is a new form of investing that involves the following of successful traders on social trading networks and replicating their trading strategies in a fully-automated manner.
The way social trading works is that you sign up to a social trading platform, such as eToro or Ayondo, deposit your funds and then search for the best performing traders on the platform whose trades you can copy. Once, you have selected several traders with profitable track records you can then set the trading software to automatically use your funds to copy their exact trades. Thereby, you will generate effectively the same returns as the professionals on the platform in a completely hands-off manner.
Social trading is an excellent way to invest in the financial markets for the less experienced investor and for those who prefer a more hands-off approach to financial investing.
Binary Options Trading
Binary options trading is another innovation in the retail trading space that has become increasingly popular with day traders and small investors in recent years. Binary options are financial derivatives that allow you to place a bet on whether the price of an asset, such as a stock, an index, a commodity or a currency pair, will end up higher or lower after a pre-determined time horizon. Usually, the time horizon of binary options ranges from five minutes to an hour. This is one of the reasons why binary options have become so popular among day traders as they can profit from short-term market trends by putting on binary options trades.
Furthermore, when you are trading binary options you can never lose more than you invested, as the downside risk is always limited to the funds put into a trade.
On the subject of the growth of the binary options market, Anthony Di Maggio, research analyst at online brokerage Stern Options, noted, “Small investors and day traders are increasingly looking for new ways to trade the financial markets. Binary options have become a welcome new financial product to fill that demand due to their limited downside risk and their ability to earn strong returns in a short period of time.”
Due to their simplicity and limited risk, binary options have become especially popular with novice investors who are just started out with investing in the financial markets.
No-Fee Trading
One of the most innovative new online trading services that has come out of the fintech sector is no-fee trading offered by the online trading startup Robinhood. Trading fees always need to be taken into account when investing your money. When you trade a lot, for example, trading fees can have a substantial impact on your overall returns. This is where the US-based online brokerage Robinhood has stepped in to offer no-fee trading.
Using Robinhood’s online trading smartphone app, users can open an account, transfer funds and buy stock without having to pay any fees. The only fees you will be charged are the US financial regulator’s fees that you incur when selling stock. These fees, however, are paid to the regulators and Robinhood does not benefit of these financially. Robinhood instead makes money through its premium services, which include margin and extended hours trading, and through interest on unused deposited user funds.
One of the most prominent features of fintech disruption is that the main benefactor is the consumer. In the past, financial services have had the tendency to overcharge its users who had little alternatives. Fintech startups are now changing that in all areas of finance and, thereby, making the financial services industry more efficient, less costly and user-friendlier for the consumer.
