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Several startups want to make it easier and friendlier for individuals to buy stocks. But isn’t pandemic-era stock picking just a bad habit that’d better be left behind? And what would safer bets look like? Let’s jump in. — Anna
Connecting new retail investors
From Netflix to Peloton, companies that enjoyed strong tailwinds at the peak of the pandemic aren’t exactly doing great right now. And yet, investors don’t seem to think that neobrokers will follow the same path.
Just this week, Shares, a stock trading app with a focus on social features raised a $40 million Series B round of funding led by Peter Thiel’s Valar Ventures, only a few months after closing a Series A round of the same amount.
Currently available in the U.K., Shares has similarities to stock trading platforms like eToro, Freetrade, Robinhood and Trade Republic. But unlike some rivals, Shares focuses on social interactions between peers, as illustrated by a fictional conversation between two users on its landing page.
Woman 1: “Guys, check out this stock. Thoughts?”
Woman 2: “This looks cool.”
That Shares’ two fictional users are both women isn’t a coincidence. French financial newspaper Les Échos described the company as also wanting to “attract women,” who reportedly already constitute 40% of its user base in the U.K. (It’s worth noting that Public in the United States has put similar weight on social interactions between users on its platform.)
There’s no doubt that the face of retail investing has changed. Since the pandemic, stock ownership skews a lot younger than it used to. And for better or for worse, meme stocks are now a thing. Expectations have changed, too: “Investing doesn’t have to be boring,” Shares argues on its website. But … maybe it should be?
Give me boring
It’s hard to know who to turn to for financial advice these days. Heck, I have been listening to Redditors more than to my banker or boomer relatives who swear by homeownership. But discussing specific stocks with my IRL friends, really? Thanks, but no thanks.
Stock picking strikes me as a stunning example of the Dunning–Kruger effect. How on earth would you know more than people who trade stocks for a living? Let alone more than the potent software they use?
And if you do happen to know more about a specific company or industry than professionals, maybe you shouldn’t be allowed to trade its stocks in the first place. Case in point, U.S. Representative Abigail Spanberger, a Democrat from Virginia, is leading a bipartisan effort to ban members of Congress and their spouses from trading individual stocks while serving in office.
Should Spanberger succeed, elected officials would be in the same boat as many journalists, who avoid perceived or potential conflicts of interest by investing solely in exchange-traded funds (ETFs), index funds and similar assets.
The most common ETFs simply replicate major market indexes such as the S&P 500 or the Nasdaq-100. Controversy on systemic risk aside, this type of passive investing is theoretically safer — but also less rewarding — for the individual investor.
“Many index funds are extremely broad, failing to capture the unique growth potential of best-in-class companies. The power law of venture and the breadth of index funds clash — and there has to be a better way forward,” VC firm Lux Capital tweeted recently.
Lux Capital’s tweet was part of a thread to publicize the launch of a niche ETF based on the Nasdaq Lux Health Tech Index, one of the thematic indexes the firm introduced in recent months.
Not all ETFs are simple
While it is interesting to see innovative ETFs emerge, increased complexity means that the category won’t be a default fit for retail investors. For instance, they might want to stay away from single-stock ETFs, an unexpected concept that not everyone at the U.S. Securities and Exchange Commission is happy with. (These ETFs allow for investors to bet on a single stock going up or down, with the value of the underlying security moving at a multiple of the underlying price; you can make more money if you bet correctly, or lose more if you do not. Single-stock ETFs feel a bit closer to gambling than makes us comfortable.)
“While I have expressed concern about leveraged and inverse ETFs before, I worry that these single-stock ETFs pose yet another, perhaps greater, risk for investors and the markets,” SEC Commissioner Caroline A. Crenshaw wrote.
With these nuances in mind, it would be too simplistic to say that single stocks are necessarily a bad investment, and ETFs are necessarily a good one. Instead, I’ll share two boring but fundamental principles: Don’t buy things you don’t understand, and don’t invest money you can’t afford to go without.
Some people think that regulators should decide who can invest in an asset class, while others say that the decision should be left to individual responsibility. But few think that neobrokers should be making that call.
Ironically, this puts neobrokers in a passive position, where they can’t do much to influence how many people are willing to invest in stocks — which also explains why neobrokers are looking to offer an ever larger range of assets.
Whether that is a large enough trading volume is another question. Is it really as big as it seemed during the pandemic? It is a bit soon to tell, but we will definitely keep an eye out for Robinhood’s Q2 earnings next week.
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