The sophistication and accessibility of technology has made it easier than ever for average people to get involved with investing in and trading stocks. In the future, as new technologies continue to emerge, it’s going to become even more accessible. This “democratized” stock trading could completely change how we think about investing—and how the average person performs economically.
So what exactly does the future hold, and how can we control for even better outcomes?
Current Technology Trends
Current consumers have access to a wide range of technologies related to finance and stocks. With stock apps, they can quickly invest money digitally, without leaving their homes. With budgeting apps, they can plan out their individual finances and save money for whatever they desire.
More importantly, they also have access to brokerage apps, which allow them to buy and sell stocks, bonds, and index funds as often as they like. Many such apps are switching to offer zero-commission trades, meaning you won’t have to pay a transaction fee for each trade you make. And with most apps offering low or nonexistent account minimums, people can get involved in trading with just a few thousand, or even a few hundred dollars.
This is complemented by the prevalence of apps meant to help investors make better decisions, all with the help of stock APIs. A stock API is a programming interface that provides real-time financial data to a source that requests it. For example, a developer working on a data dashboard might use a stock API to provide dashboard users with accurate, up-to-the-minute data on individual stock performance or broader performance metrics. With better APIs, developers can make even better apps—and consumers can become even more educated, ultimately making better investment decisions and feeling more “in tune” with the market.
Trends are also moving toward machine learning and artificial intelligence (AI). Algorithmic trading, which relies on data derived from stock APIs, uses machine learning and intelligent decision making to buy and sell assets on users’ behalves. Rather than being forced to conduct individual research and make risky decisions, investors can rely on the performance of an impartial, data-driven algorithm.
The Benefits of Democratized Stock Trading
Already, democratized stock trading has had a number of positive effects, which should increase even further in the future:
- Stock investing for all. The stock market has historically performed well, with occasional bear markets and recessions that temporarily disrupt earnings. Generations of people have used it as the cornerstone of their retirement planning strategy and used it to generate wealth. However, many people have avoided investing in the stock market because they don’t have the available capital, because they were too intimidated to try and figure out how to invest, or because they were afraid of making a bad decision. Now, the democratization of stock trading has made it possible for anyone with a bit of extra cash and an internet connection to get involved in investing.
- Higher overall financial knowledge. The accessibility of real-time stock market data and other financial data is also playing a role in boosting overall financial knowledge. Fiscal literacy has always been a problem, especially in the United States, and while the introduction of a few new apps won’t immediately change that, the downstream effects can be highly positive. Experienced investors now have faster, more accurate channels where they can learn more about their investing prospects, and total newbies can dive into investing even if they’ve never considered it before. Additionally, the prevalence of stock API-based apps is increasing the popularity and public perception of stock investing, leading to more independent learning.
- Wealth distribution. Regardless of how you feel about it politically, there’s a massive wealth divide in the United States; the wealthiest people control far more capital than the poorest people, proportionally. And because capital can be a source of further growth, that becomes problematic—especially over the course of multiple generations. But when even the poorest members of society have access to a mechanism of financial growth, it becomes possible to build a more equitable distribution.
- Funding opportunities. Some people view stock investing as unidirectional, but remember, the entire reason the stock market exists is to allow businesses to attract more funding for growth. If you’re considering starting a corporation and you’re interested in raising capital to expand, the stock market is one of your best options; more people investing means more prospective investors you can call upon to gather the capital you need.
- Financial opportunities. There are also opportunities for software developers and financial experts. With the availability of smarter, more reliable stock APIs, developers can create apps and tools that other people can use to improve their knowledge or improve their investing approach. This is both financially rewarding for the people creating the tools and practically useful for the people using them.
Repercussions of Democratized Stock Trading
Are there any repercussions or side effects as a result of higher access to stock trading?
- Individual risk. As with any financial endeavor, the individual bears some level of financial risk. In a world of democratized stock trading, individual investors are left to their own devices to perform due diligence and assess risk. If non-experts are allowed to buy and sell assets at their own discretion, it could leave them with higher losses. The stock market has historically performed well over long periods of time, and assuming a diversified position, but this is still no guarantee of success—especially if individual investors are ignoring conventional advice or making emotionally reckless decisions.
- Economic bubble formation. Economic bubbles have the potential to bear significant economic consequences, including the development of large-scale recessions. Bubbles begin to form when an asset becomes overvalued, or overly popular; with too many people buying in, prices skyrocket beyond reason, and an untenable number of investors hold the asset. Later, the bubble “bursts,” prices plummet, and consumers and institutions alike lose millions (or even billions) of dollars of collective value. More people investing in a collection of assets could make it easier for such a bubble to form.
- Flash crashes. We also need to consider the potential consequences of algorithmic trading. Stock trading algorithms tend to make decisions much faster and at much higher volume than individual investors, which can trigger events like “flash crashes,” where the prices of a given asset or collection of assets plummets seemingly spontaneously. Fortunately, the market has already taken measures to correct for events like these in the future; “circuit breakers” shut down the market if a period of activity is too volatile or destructive, as a safety mechanism to prevent further undue losses.
- Price inflation. Over time, the democratization of stock investing will increase demand and trading activity. More people will be buying and holding stocks, which can drive relative prices higher. In some ways, this could represent a higher barrier to entry for the next generation, but it also provides an avenue of growth.
Adapting to a New Environment
Overall, the democratization of stock trading doesn’t seem to be an inherently good or bad development. More individuals are going to have access to prospective investment growth, but they’re also going to be exposed to more risk. People will be better financially educated, but highly volatile, unpredictable events are still going to flourish.
It’s important not to view democratized and algorithmic stock trading in terms of good or bad, but instead acknowledge that it’s a complex new environment with astounding new opportunities. The accessibility of new information, particularly with the help of stock APIs and new apps, is never a bad thing. However, it will take time for the market (and individual investors) to adjust to the new possibilities. As technology continues to advance, we’ll need to adapt to those changes even more rapidly.
This article was update 3-15-2022.
