In the last 20 years, evolutions in technology have provided wave after wave of new tools for investors to harness.
Originally, the internet provided the opportunity for investors to share information and consume news far faster than before. This helped to level the playing field between armchair investors, and professional traders with Bloomberg terminals.
Later, online discount brokers emerged which were able to significantly undercut the trading fees charged by traditional, full service stockbrokers. Also, comparing stockbrokers became much easier with online portals which would list all online services and allow users to filter by functionality, fees, country of domicile and so on.
The selection process became quick enough that an investor could compare the whole market, open an account and place their first trade in a single afternoon.
Peer to peer platforms
In the last ten years, peer to peer platforms appeared which offered the promise of cutting out the middleman in different types of financial transactions.
Peer to peer lending is perhaps the best example of technology being used to improve the outcome for both sides of a trade. Previously, if a business or individual wanted a loan, they needed to go to a bank and apply for finance.
The bank would pay savers a paltry rate of 1 – 2% interest on their savings account, and would charge 8% or more to the borrower. After accounting for bad debts, the bank would make a sizable profit on this interest differential.
Peer to peer lending platforms did not seek to make a profit in this way. Instead, they focused on building the infrastructure that would allow an investor to directly lend to the borrower, charging only a small fee in return for match-making and administration.
As a result, investors got a great return compared to their bank account, and the borrowers were offered a lower rate. You could say that tech helped both sides ‘split the difference’ in terms of the margin previously enjoyed by the bank.
With competition between brokers intensifying, the quality and complexity of services offered by online stockbrokers began to shoot up.
Also, a different breed of financial institution emerged onto the scene which offered ‘contracts for difference’. This is a form of financial contract in which the institution offers to pay an investor a return closely linked to the performance of an underlying asset. This allows investors to take leveraged positions with little upfront capital. This is high risk and many investors lose their money, but the rise in CFD trading is representative of the overall diversify of brokerage options now available to an investor.
A common theme with brokers and other trading platforms is access to live charting data, and a recent new tech is the creation of ‘social trading platforms’, where an investor can choose to ‘follow’ (aka mirror) the trades of established and proven traders already on the platform.
Technology is levelling the investing playing field
Overall, the general effect of new fintech start-ups is a great leveling of the playing field. No longer will fund managers and bankers have access to complex charting, the latest news, and fast trading technology. This can mostly be obtained from the comfort of your bedroom with the right provider!