How do trading apps encourage gambling?
Trading apps make investing in securities easier for everyone – often featuring colourful animations or low fees. This can tempt younger and less experienced users in particular to trade impulsively. People who use trading apps tend to take more risks and trade more frequently than other investors, and on average have less financial knowledge.
Research into this is being carried out by Professor Silja Grawert and HM alumnus Dr. Jonas Freibauer from the Department of Computer Science and Mathematics.
Trading apps such as Trade Republic and Scalable Capital have been booming for several years now. What motivated you to conduct academic research into this trend?
Freibauer: We wanted to understand how this new form of investing is changing the behaviour of retail investors in the long term. Trading apps are easily accessible, low-cost and often designed to be fun – this lowers the barriers to entry, but can also lead to people investing without really understanding the risks involved.
What exactly distinguishes users of trading apps from traditional online investors?
Grawert: Our data shows that users of trading apps are, on average, younger, trade more frequently and take greater risks. It is interesting to note that, although their knowledge of financial markets increases over time, it remains low overall. Only seven per cent said they understood how the app’s business model works.
Freibauer: At the same time, their appetite for risk increases over time – a combination that can be problematic. Those who trade frequently often achieve lower returns in the long term, as higher fees can eat into their profits.
Are trading apps mainly a risk, or do they also present an opportunity?
Grawert: Both. They have the potential to attract more people to the capital market and thus contribute to retirement provision in the long term. However, it is important that users gain greater confidence in managing their investments through educational resources and trial versions. Only if knowledge and experience grow in tandem can investing via apps have a truly sustainable impact.
What does this mean for financial literacy in Germany?
Freibauer: Trading apps reflect the fact that many people are engaging with the topic of investing for the first time. This is fundamentally a positive development. However, without accompanying financial education, motivation can quickly turn into frustration. That is why financial service providers and educational institutions should work together to find ways of effectively combining knowledge and practical experience.
Study: Freibauer, J., Grawert, S., & Rieger, M. O. (2024). The effects of trading apps on investment behaviour over time. The European Journal of Finance, 1–25. DOI: 10.1080/1351847X.2024.2401604
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