Beware apps that make investing look easy – you could lose serious money

Investors are being urged to stay clear of fun-looking investment trading apps on phones – because they can easily result in users losing money by making ill-considered investments. 

The ‘gamification’ of investment trading apps is a growing trend where light-hearted images – for example, entertaining cartoons of people celebrating or perhaps surfing at a holiday resort – are used to reel in new customers. 

The apps often offer ‘free’ trades to entice new investors, many of whom are young, have not invested before and are drawn in by the prospect of making quick profits. Major players include eToro, Revolut, Robinhood, Trading 212 and Webull. 

Widespread concerns about these apps have now been picked up on the regulator’s radar. 

This week, the Financial Conduct Authority (FCA) will demand that the companies behind these apps provide clearer warnings about the risks of using such tradings hubs. 

California-based Robinhood started the gamification trend a couple of years ago – with investors seeing their phone screens fill with celebratory confetti every time they traded. Following widespread criticism, it replaced the confetti with floating shapes. 

Novice investors used the Robinhood service to buy exposure to video game firm GameStock. 

Its share price jumped from $20 to $480 in a matter of days. Robinhood was forced to stop customers from trading in GameStock when it was obvious investors were taking bets they could not afford to lose. GameStock’s share price later tumbled and now stands at $25. 

Robinhood blurred the line between investing and gambling. It encouraged novice investors to trade using complex financial instruments such as options and contracts for difference (CFDs) where two thirds of investors end up losing money. 

It is not the only risky investment punt available through these kind of apps. They also offer the chance to invest in high-risk cryptocurrencies. The price of Bitcoin, the most popular cryptocurrency, soared to $69,000 last year, but has since tumbled to about $17,000.

Robinhood has more than 19million users worldwide and attracted six million new customers last year. But the biggest player is eToro which has more than 28million registered users – up eight million this year. 

Revolut, Trading 212 and Webull have 15million, 1.5million and 11million customers respectively. 

Krisztian Gatonyi, senior analyst at website BrokerChooser, says: ‘Many of these apps grab investors by using emotional appeal to make investments seem fun. They have a tendency to oversimplify complex products. Most people should never get involved with options or cryptocurrencies as they are high-risk investments.’ 

He adds: ‘These outfits make money by encouraging investors to trade. Unfortunately, investing is not all about buying and selling in the short term. An investor is unlikely to get rich quick and is usually better off making fewer trades and taking a long-term view – that is, investing rather than taking a gamble.’ 

Gatonyi believes that using a mobile phone to trade shares should be avoided by most people. He says: ‘There is something addictive about using a phone to invest. It encourages investors to check how their investments are doing several times a day – and to buy and sell more often than maybe is good for them.’ 

He adds: ‘This can prove financially unhealthy and create unnecessary stress. Investing is a serious pursuit that an investor should set time aside for.’ The analyst is also concerned that trading apps regularly text or email investors with messages encouraging them to trade more than they should. 

Charles Archer is a respected independent investment consultant. He believes novice traders should be required to prove they understand complex financial products before being allowed to trade – in the same way that a motorist must pass a driving test before being allowed out on the road on their own. 

Archer says: ‘A simple 20-minute multiple choice quiz should be required before anyone is allowed to trade these complex financial investments. Maybe, they should have to trade on a trial basis to begin with.’ 

Wealth manager AJ Bell launched its own easy-touse investment app Dodl earlier this year. Although it includes cartoon images of friendly monsters to lure customers, it keeps the investment process simple by only offering share trading. It charges an annual fee of 0.15 per cent and a trading charge of 0.5 per cent. 

Russ Mould, investment director, says: ‘We are trying to make investing less complicated and easier to understand. As part of this, we have built Dodl around shares and investment funds. 

‘Introducing complexity in the shape of options and cryptocurrencies would increase the likelihood of confusion and investors overreaching their risk appetite.’ 

The Dodl app is regulated by the FCA as are Trading 212, Revolut and eToro. Although Robinhood is a US firm, its UK arm is covered by the FCA. US-based app Webull is not covered by UK regulation while cryptocurrency is not regulated by the FCA. 

On Friday, ahead of its announcement, the FCA told The Mail on Sunday: ‘We have concerns about the way firms may be encouraging consumer investment through apps and we are due to publish a report into their use very shortly.’ 

On Friday, Revolut said: ‘We provide clear and detailed information to our customers about our trading products and the risks that are associated with buying and selling shares or crypto assets.’ 

It added: ‘We launched a ‘learn and earn’ education tool on our app earlier this year.’ 

Robinhood thanked the MoS ‘for reaching out’. It sent links to educational blogs it said are available for all customers. 

Trader eToro said: ‘By nature trading and investing should be considered risky, but we will continue to do everything we can to ensure clients understand the risks involved.’ It insisted ‘gamification’ is not a feature of its platform but may be used ‘in an educational context’. 

Both Trading 212 and Webull did not respond to our requests for a comment.