What democratized investing means for the future of finance
Should financial education and services be more widely accessible? If you’re anything like me, you probably answered “heck yes!”
As market conditions grow increasingly uncertain, the argument for democratizing finance is gaining traction – as it should. Beyond accessibility, market democratization means providing more options to people from all income levels and making finance more approachable.
When financial services are accessible and developed with the investor in mind, people from all sides of the income spectrum can grow their wealth over the long term and be empowered to make better financial decisions.
The time to start is now — you shouldn’t wait to take control of your finances. In a 2020 Nasdaq survey, 24% of respondents said they didn’t learn the basics of investing until after their 30th birthday. Because the fundamentals of personal finance are lacking in many schools, many are left to learn on their own — so it’s no wonder so many people consider investing out of reach.
In this blog we explore some of the reasons why investing has had to become more accessible, the challenges that still remain with market democratization, and end it off with some tips for beginner investors.
Let’s get into it!
Why should investing be accessible?
Investing makes it possible for individuals to grow their money over years or decades, much more than they could with just a savings account. Because inflation makes your money less valuable over time, letting it sit in a savings account could actually result in your funds being worth less than when you deposited them.
Investing gives your money a fighting chance against inflation because your rate of return can be higher than the inflation rate. Of course, investing is riskier than a savings account, but it can pay off in the long term — especially during turbulent markets like we’ve been seeing.
Considering how vital investing can be to your long-term financial stability, it seems like a no-brainer to bring those benefits to as many people as possible by making it more accessible.
Then vs. now
For generations, the benefits of investing have been off limits for those who don’t have the time or money. The lack of technology made it difficult and expensive to make trades and finding resources to learn about investing was a challenge for the average person.
Online trading didn’t gain popularity until the 90s, with the rise of the internet. Before that, if you wanted to make a trade you’d have to call up a specialist from the stock exchange to make it for you. Even if you could figure all that out, if you didn’t have the funds for high up-front minimums or commission fees, investing was still inaccessible to you.
Now, individuals are taking control of their financial destiny, whether by choice or necessity, as technology has made investing easier, more accessible, and less expensive. Globally, users of major low and no-fee stock trading apps grew from 61.9 million in 2019 to 91.5 million in 2020.
And technology isn’t the only factor driving change in the financial landscape either.
Factors driving change
You’re probably familiar with our unfortunate economic conditions by now, but to sum it up: we’re dealing with the aftermath of a pandemic, a high cost of living, inflation, an unstable housing market with astronomical prices, and geopolitical conflict affecting global commodity prices…just to name a few.
This big mess has made it almost necessary to invest if you want to preserve and grow your wealth for the future.
Attitudes about finance also shifted as people were forced to reevaluate their financial situations after some lost their jobs and uncertainty loomed. Understandably, people have become more stressed about finances during the pandemic.
With people at home with lots of spare time on their hands, many took the time to learn to invest. They funneled their financial fears into educating themselves to make more informed financial decisions and prepare themselves for future economic uncertainty.
But where do you learn about finances when you can’t visit the bank to talk to an advisor? The internet of course.
Social media platforms, specifically TikTok and Reddit, exploded with financial information and advice geared to all kinds of investors during the pandemic.
Others took a slightly different strategy by finding power in the collective of those buying meme stocks, which are shares of a company that have gained a cult-like following on social media. Reddit communities like r/wallstreetbets build hype around a stock which influences the prices of those shares.
The meme stock phenomenon started when r/wallstreetbets investors half-ironically rescued the stock of Gamestop, which was on the verge of bankruptcy. The company was a target for short sellers and had a large hedge fund betting against them, so individual investors saw an opportunity to potentially save the company and fight back against the injustice they perceived — or simply make a buck on the trend.
At this point, online brokerages had grown exponentially in popularity, so just about anyone with a smartphone and some cash could get involved. These investors even got the attention of billionaires Elon Musk and Mark Cuban, who thanked redditors for “changing the game.”
Obviously, all of this caused a lot of panic and concerns for well-established investors and regulators. The U.S. House Committee on Financial Services even held Congressional hearings to understand what exactly happened. Some expressed a fear that instead of democratizing investing, the online brokerages were gamifying investing and potentially fostering addiction in the young people participating.
But there’s two sides to every coin. While the concern is justified, there’s also an opportunity to turn gamification into a more positive tool. It’s clear that this strategy is attractive, specifically to young investors, so it might be beneficial to responsibly use gamification to inform and attract them. Gamifying wins and losses in finance, when done correctly, could help investors set goals and track them much easier (while also making it less intimidating).
The advancement of technology was a huge driver of the cultural phenomenon of meme stocks. Fintech (or financial technology) companies have made investing simpler and more accessible — like enabling people to make trades instantly without leaving the couch. In the US, the market for online stock brokerages has seen yearly growth of 9.2% between 2017 and 2022.
Rise of fintech to fill in the gaps in accessibility
As technological advancements made the creation of online trading platforms possible (like yours truly), more individuals were able to access investment services. Global fintech funding also significantly increased in 2021 as companies developed different ways to tackle the inaccessibility problem and keep up with increased demand.
Fractional investing, for example, has made it possible for investors to buy stocks at much lower price points. Instead of owning one or more full shares of the stock, you own a portion of one. A huge benefit of fractional investing is diversification — you can have smaller amounts of money spread out across different stocks to reduce your overall risk.
What makes the deal even sweeter is that fractional shares often go hand in hand with low or no commissions on trading, meaning you don’t have to pay fees on such small transactions. This has made it much easier for beginner investors to get practice without breaking the bank, and overall makes investing more accessible as the up-front investment minimums are lower.
Other innovations in alternative investments, including cryptocurrency and exchange-traded funds (ETFs), have recently grown in popularity – particularly with new generations of investors. Global alternative investments are predicted to grow even more — 18-25% by 2025. The wide variety of choice can empower individuals to evaluate their options and choose something that’ll work the best for them.
While it’s great we’re seeing all these changes, we’re still far from seeing truly accessible investing.
Challenges still remain
The economy poses a risk to new and inexperienced investors
If you started investing a few years ago, you might’ve experienced some solid returns. But now, with the challenges of the economy, people are apprehensive of investing for the first time (which makes total sense).
If you’re exposed to low market returns early on in your life, you tend to shy away from financial risk later on. Millennials and Gen Z have hardly experienced investing without a crisis, so it can be very discouraging.
Experiencing downturns in the economy can also lead to “financial trauma,” which is disproportionally felt in minority and immigrant communities.
It’s become necessary to improve your financial education in order to navigate the volatility and uncertainty in the market. But that’s much easier said than done.
Low financial literacy
Financial literacy is the knowledge and understanding of key financial skills like budgeting, saving, and investing and the ability to use them effectively. The more financially literate people become, the better decisions they make. Conversely, the less financially literate people are, the easier it is to make decisions that contribute negatively to their well-being and socio-economic status.
The playing field is also not level when it comes to financial literacy — the gap in financial knowledge (unsurprisingly) translates to a wealth gap. Financial literacy rates can also vary between income levels, race, gender, and geographical locations.
Unfortunately, financial literacy is relatively low globally. While the amount of people learning about financial topics has grown, the 2020 OECD Survey of Adult Financial Literacy found that only 17% of respondents self-assessed their knowledge of financial topics as high. 26% estimated their knowledge as low.
The skills associated with financial literacy are essential during a crisis. During the pandemic, for example, basic financial knowledge helped people who got left behind take back some control.
The challenge of low financial literacy is both helped and hurt by the increase in financial information freely available online.
Navigating the abundance of financial information online
With the rise of “fintok” and personal finance Reddit communities, it can be hard to know if the information you’re consuming is grounded in financial fundamentals or someone’s individual perspective. There’s also a higher risk of scams, as we’ve seen recently with NFTs and cryptocurrency, where people make false claims about potential investment returns.
In times of economic uncertainty, the problem only gets worse as we typically see more financial education resources popping up. The easy accessibility of financial content on social media can definitely be a good thing, as long as you’re engaging in best practices.
Our financial literacy blog has more on this.
Innovation is outpacing regulation
The complexity of the financial marketplace is increasing rapidly. Canada has one of the fastest growing financial sectors in the world. This growth is partly because of the rapid growth of fintech, which dramatically changes the way people use financial services. The implications of these changes go beyond what the law has outlined, making it increasingly important for regulators to keep up with the growth.
Cryptocurrency is a perfect example of this. It’s a globalized product with many exchanges operating across borders. However, there’s a lack of consistent global policy for cryptocurrency, which leads to a lack of clarity for consumers around who is protecting them. In the US, individual states create their own cryptocurrency laws, leading to even more confusion with regulations varying within the country.
Increased volume of investors is causing a strain on infrastructure
New products like fractional shares have forced exchanges to adapt quickly to account for the type of product and increased trading volume. Coordinated investor activity, like with meme stocks, can also impact prices and create issues with liquidity (how fast you can turn your investment into cash).
A greater potential for unintentional investor harm
Because of all the changes in the marketplace, it’s difficult for individual investors to effectively evaluate the risk of all the new products and services.
Factors that have a strong influence on investor psychology like gamification only add to the complexity of the problem.
Innovation is a good thing — it helps us solve problems in new ways. But in order to protect people and further financially empower them, proper safeguards and protections have to be in place.
So, how do you get started investing with all these challenges?
Strengthen your financial knowledge
First and foremost, if you’re a brand new investor, you should learn enough to feel comfortable about investing your hard-earned money — reading this blog is a great start! Even if you’re not brand new, improving your financial literacy can help you navigate the information challenges we’ve outlined. We have a blog on the subject you definitely should check out, but overall, having a solid understanding of financial topics can make it easier to:
- Retire comfortably
- Avoid excessive debt
- Deal with emergency expenses and unpredictable economic conditions
- Meet your personal finance goals
- Make better financial decisions with less stress and anxiety
We also have a video-based learning hub called Flahmingo Central in our app — it’s where you can learn the basics and complexities of investing all in one place and from a reliable source.
Consider fractional investing with Flahmingo!
We mentioned fractional investing before, but here’s how it actually works — it’s a great option for beginners.
Fractional shares make it possible to buy partial shares of a stock. Say you have $25 available to invest, and shares of Company XYZ are $500 each. With fractional investing, you can buy 5% of a share with your $25. This lets you make investing decisions based not on how much money you have, but on how well you think a company is going to perform in the long term.
Also, investing small amounts is less intimidating than investing hundreds or thousands of dollars at once — if your investment loses value, it’s not as detrimental to your finances as a larger sum could be.
Beginner investors can have impressive portfolios with stocks that might have otherwise been out of reach through fractional investing. And because it enables you to buy many shares for low amounts, you can buy very broad selections of stocks to further the benefits of diversification — a fantastic benefit for new investors looking to passively invest.
How to buy fractional shares with Flahmingo
We make it easy as Pies and Slices for anyone to buy fractional shares in Canada, whether you’ve never made a trade or you’re a seasoned professional — you only need $1USD to get started.
Here’s how you can use Flahmingo to buy fractional shares in Canada:
Step One: Fund your Flahmingo account
Step Two: Create a Pie (in other words, a portfolio). Your Pie can be named whatever you want — whether it’s a goal you’re working towards (Vacation Pie) or the industry you’re planning to invest in (Tech Pie).
Step Three: Choose your Slices (stocks or ETFs). You can add up to 100 Slices to your Pie! There are more than 5,000 securities to choose from on the Flahmingo app.
Step Four: Choose the dollar amount you want to invest in your Pie, and specify how you’d like that money split between Slices.
For example, maybe you invested $100 in your Pie, and you'd like that money divided evenly between five Slices. That would mean 20% of your total dollar amount is allocated per Slice.
Step Five: We’ll invest your money based on the percentages you chose.
Let's say you want to invest $500 in Company A, and that company's stock is trading at $30 each. You'd be able to buy 16.66 shares – and the best part is, you don't have to do that math yourself!
The bottom line
Even though there are many factors out of your control, your financial freedom is in your hands. With new innovations and changing attitudes, there’s never been a better time to get started on growing your wealth and building a better future for yourself.
Overall, by making investing more accessible and approachable, more people can feel empowered to take charge of their finances and we, as a collective, can make better financial decisions that lead to a brighter future.