These apps are deceptively simple and accessible to anyone with a smartphone, so they’re often used by inexperienced traders who end up losing money – instead of making money.
It’s important to know what the issues and risks are, and how you can keep your money safe.
In this article, I’ll give you all the information you need on how these apps work, how people lose money, and what you can do to protect your investments.
Understanding Trading Apps and the Risks Involved
To begin, I’ll outline how these apps work and show you the traps many people fall into. Then, further down, I’ll take you through the steps for using trading apps wisely and look at ways to protect your money.
What Are Trading Apps?
Trading apps enable you to trade stocks, shares, and any other listed investments from an app on your smartphone. It’s the same process as trading with any form of brokerage.
But apps make it possible to trade wherever you are, potentially speeding up your trades. Many apps are also marketed at inexperienced investors and aim to make the process more accessible.
Trading apps are rarely standalone brokerages (most apps are a product of a much larger investment company) and the app is just one way of trading with them. Often, you can trade through an app and have an online account that lets you access the platform on your computer or laptop. There are some exceptions to this though – and I’ll review those below in the ‘types of trading apps’ section.
In most cases, stock trading on apps tends to be aimed at short-term stock trading. This is when you buy and sell stocks over minutes, hours, or days. It’s different from long-term stock investing, which is the process of buying and holding shares in a company over several months or years.
Types of Trading Apps
There are many different trading apps available. They vary in how much they cost to use, what you can trade, and the level of expertise required to make use of them. Types of trading apps include:
- Major Brokerage Apps: Most major brokerages have an app that allows their customers to trade and check their stocks from their mobile devices.
- Mobile-trading Only Apps: Apps such as Robinhood started as app-only (though they have since added a website). Apps that are not associated with major brokers tend to be targeted towards novice investors rather than those with years of experience.
- Free trading apps: You’ll find some apps available that don’t charge you to invest, and don’t charge commission. These are great for making trading accessible but may entice people to go overboard with their investments.
- Practice apps: Practice apps emulate the process of real stock trading, but with no real money involved. Also called paper trading apps, they are designed to give first-time traders experience in the process without having to put money at risk. These can be useful when you’re just getting started – see the section on ‘how to protect yourself from losing large amounts of money’ below.
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- Ally Invest: Best for new investors and those looking for a very easy website to navigate.
- TD Ameritrade: Ideal for more experienced traders looking for a rich set of tools and resources.
- E*TRADE offers trading platforms and tools for any investment style
- Robinhood is a mobile app that allows you to trade stock for free. It’s designed for those with little to no experience in trading.
- The eToro mobile app is designed to be user-friendly and has good functionality for CFD trading.
Ultimately, you’ll find a wide array of trading apps with different capabilities and features. Equally, they all have their pitfalls and complications – so researching your trading app before you get started is an important part of protecting your funds.
How Do Trading Apps Work?
Trading apps work by allowing you to trade all kinds of instruments – from forex to cryptocurrencies – from your mobile device. Users simply need to set up an account with their chosen broker, deposit their funds, and begin trading.
Popular app brokers such as E*TRADE, Robinhood, and Charles Schwab provide an order flow to Wall Street firms. Each time a customer trades on the app, Wall Street firms buy or sell those shares and work out what price the customer will get. Firms pay the app brokerage for the right to perform these actions, which is how the apps themselves make money.
For the most part, trading apps work in the same way that any brokerage functions – so they shouldn’t be thought of as anything other than fully-fledged trading portals where you can invest, lose, and gain funds.
Why Do Some People Lose so Much Money?
You’ve probably heard of people making their fortune through trading – but equally, you’ve no doubt heard of people losing all of their savings in the same way.
That’s because stock trading can be complex, and those with little experience in the field find themselves building up losses, and then investing more money in an attempt to recover those losses. This can become a vicious cycle.
This is particularly relevant to trading apps because they appeal to the mass market and a greater number of inexperienced investors. Some trading apps may also encourage inexperienced investors to put more at stake (more on that later).
Some of the main reasons people end up losing so much money on trading apps are listed below:
The downside to having instant access to online trading on smartphones is that it can be all too tempting to buy and sell on a whim. When not treated as a proper financial transaction, and without the due research, users can make poor decisions. While each loss might not be huge, these can build up over some time.
Being Fooled by the Simplicity
Simplicity isn’t necessarily a bad thing – but trading is notoriously complicated and believing it to be simpler than it is can land you in hot water. Unfortunately, some apps may lead you into a false sense of security.
Some apps send push notifications and emoji-filled messages to make the whole process seem game-like. This can encourage young users to buy and sell some of the riskiest financial products.
These trading apps do not force anyone to invest – but the way they present opportunities may encourage users to make risky investments without fully realizing the risk. This isn’t to say that apps aren’t good for trading, but they demonstrate how you need to be aware of the reality of trading.
Letting Emotions Guide Decisions
People lose money when trading stocks because they are driven too heavily by emotions – namely greed, excitement, and fear. These emotions impede our ability to make rational decisions.
Traders can be tempted to buy too much of something that seems to be doing well (greed) or sell stock in haste and miss out on potential profits when they get bad news about it (fear).
Further, the ‘rush’ of making a quick profit can quickly become addictive, particularly with instant access on mobile devices. This can lead to investing more cash funds than you can afford.
The key to being a successful trader is managing your emotions and not letting them influence your decisions. Have a plan, do your research, and use proven strategies to avoid making emotion-led decisions when using your app.
Rushing Into the Market
Because modern technology makes it possible for things to happen instantly, it can be hard to avoid rushing to get on board with the latest craze. This is particularly true with trading, and it’s one of the reasons people lose lots of money.
When individuals hear about a hot new trading app or stock that’s rising exponentially, they follow the crowd and often lose out. Before you even consider investing a dime, do some research and look at investment sectors that you may have some knowledge about.
Having a Get-Rich-Quick Mentality
Some people lose lots of their money when trading because they approach it as a get-rich-quick scheme. Unfortunately, some apps (particularly those aimed at the millennial market) will use strategies to present trading as exactly these kinds of schemes. It’s easy to lose all of your investment dollars in a flash with this mentality.
The bottom line is that many people will fail miserably when trading through apps for several reasons, any of which can affect you if you’re not careful.
How to Avoid Losing Money with Trading Apps
As you can see, trading on apps is a risky business. Many people find themselves left out of pocket when they jump in at the deep end. So, what can you do to avoid getting into trouble and losing more money than you’d initially anticipated?
This section provides steps you can take and things you should consider to help keep your investments safe and smart.
What Should You Consider When Choosing a Trading App?
Choosing the right app is a big part of protecting your funds. The selection of trading apps available on iOS and Android is ever-increasing, and some may seem just too good to be true.
Here, I’ll take a look at some of the things that you should consider when trying to find a trading app that’s right for you.
The most important rule for choosing a trading app is making sure that it is safe and legitimate. Always avoid apps and brokers that are not licensed and regulated. If you’re unsure about an app, a quick search online will usually be enough to tell you all you need to know.
Your Level of Knowledge
There are many trading apps suited to total beginners, and there are some that are designed for investors with more experience. While it might be tempting to choose an app with as many features and in-depth research tools as possible, this can be a mistake for those with little knowledge in the area.
If you’re new to trading, look for user-friendly apps, and read reviews for the best apps to get started with. Many of the tools available on apps for advanced traders will be too complex for you to use right away and may lead to losing money through error.
What You Can Trade
Some apps will allow you to make all kinds of investments, whereas others focus on main categories such as forex. Think about what you want to trade (and what you most understand) and look for apps that offer them: consider funds, ETFs, stocks, cryptocurrencies, and options.
Don’t choose an investment based on what other people are doing – particularly if you don’t understand it. It’s much better to choose something that you can make sense of, or that you’ve done some reading about.
Tools for market research help you understand your investments. Some apps will feature in-depth analysis tools, whereas others (usually those aimed at the less experienced investor market) will only offer simple tools that show you basic information.
Consider how much time and research you can put into your trading practice and select an app with the appropriate level of market research tools and data available.
You’ll find that apps come with a wide array of features and functions – and in many respects, these can be useful. But, if you’re not very experienced in the world of trading, it’s not always wise to go for the one with the most bells and whistles. Choose something simple that works for your level of skill and budget instead.
Consider how much you can afford to pay in fees. Some platforms charge a flat fee, whereas others charge according to you how much you have invested.
Many apps aimed at inexperienced traders advertise themselves as platforms for free trading. This means that you don’t have to pay to trade, and they don’t take a commission. While this can be a great feature when you’re getting started, don’t let it tempt you to invest more than you would otherwise. On the flipside, though, many apps don’t charge a fee at all to trade (like Robinhood). This is a great bonus but can also lead to emotional decisions.
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How Can You Protect Yourself from Losing Large Amounts of Money?
Understand the Risk Involved
The first thing to remember when you begin trading on an app – or any type of trading – is that investment is always a risk.
It’s never guaranteed that you will get your money back, let alone a return. You should always work from this basis, and avoid considering an investment a trivial pursuit, as it can soon spiral out of control. When trading, you need to employ risk management strategies to stop you from losing lots of money.
These may include:
- Planning your trades carefully rather than making decisions on a whim
- Diversifying and hedging: as the saying goes, don’t put all of your eggs in one basket
- Setting a spending cap
Only invest what you can afford to lose. It’s a simple rule to follow, but many get carried away with the rush and excitement and invest more than they can afford to lose. By budgeting properly, you can decide how much available cash you must invest and when to take risks.
Practice With Paper Trading (Use a Demo Account)
The term ‘paper trading’ originates from the stock trading markets. Investors would write their trades down on paper and then track the market movements to see if they were successful as a way of practicing.
What does this have to do with trading on apps?
First, it’s just as important in today’s world to practice trading before investing real money. Today’s technological version of paper trading uses a trial or demo account.
A demo account enables the user to practice trading without having to use any real money. This makes it risk-free and allows you to learn (and make mistakes) without losing any money. Many apps will have their version of this, offering a trial or training course. You can also find many practice platforms online.
You might be wondering if it’s worth practicing with a demo account or if there are any drawbacks. I think that this can be a useful tool for people without much experience in trading, but there are a few things you should bear in mind:
- As paper trading doesn’t involve any real money, people are often more likely to take higher risks. You don’t lose anything by doing this, but you’ll want to try and practice like you’ll invest. If you use a demo account, make sure you take it seriously and properly track market activity. This will make you much more prepared for real trading.
- Many demo trading accounts aren’t just there to help you learn – so beware of the demo account with fake data. Some trial platforms utilize fake data as a means of luring you into the real-money arena. You might find yourself successful with the practice version, but not so lucky when you start trading for real. Always look for a practice account that uses real-time data.
If you keep these pointers in mind, demo accounts are a great way to learn how to trade and assess the risks involved. I recommend testing out your trading on a demo platform for at least two days (but probably more) before you delve into the world of real trading.
Read Learning Material or Take a Trading Course
Ultimately, you’ll make fewer mistakes and have better capabilities to protect your investments if you do as much learning as possible.
Fortunately, there’s lots of learning material online, including:
- PDF tutorials
- YouTube videos and dedicated channels
- Blogs and web articles (but look out for ones trying to hard-sell a trading app, as they’re unlikely to provide impartial advice)
If you’re serious about using trading apps, you could consider going on a trading course. Many of these specialize in trading an instrument – such as forex – so if there’s a particular niche that interests you, why not try it?
Do note that many trading courses will charge you large fees, so it’s not the cheapest option to help you learn.
Even if you use a practice account first, nothing can emulate what it’s like to trade with real money – so don’t blow your budget as soon as you get started. Start with a small amount of real money when you go live and see how you do. As you gain confidence, begin to invest more when and where appropriate.
The sad fact is that many people lose money with trading apps. That’s why it’s so important to understand how they work, what the risk involved is, and take steps to protect your investments.
But there are ways to keep your money safer and your trading smarter. Using trading apps is never risk-free, but it doesn’t have to be a disaster when you remember these simple tips and tricks.
Want to Know More?
Here’s a horror story about how one trader lost more than $800k on a trading app.