When thinking about evolution, memory usually refers to processes of thousands of years, but when the term “financial” is added, the time scale is reduced to just years. At the end of the last decade, words like “Fintech” were little known today. They are part of the democratization of financial systems and show how, from a smartphone, you can access a credit card, or you can invest online in shares of companies like Apple.
An evolution that is advancing at such a dizzying pace that not even the regulatory entities themselves can reach it yet, and whose context poses more risks for those who wish to take advantage of the options to invest online that are offered these days. Yes, there are benefits such as lower operating costs and access to stock markets 24 hours a day, but there are also risks inherent to a new activity from which third parties also seek to take advantage.
However, there are ways to ensure that the risks in the investment are those implicit in the capital market, such as price fluctuations, black swans, external factors that condition the needs, and not those that are part of the new model in which they are carrying out these operations such as online transactions.
The International Organization of Securities Commissions (IOSCO), whose members represent more than 95% of the capital markets in the world, has some recommendations when investing through electronic platforms, which begin by knowing the origin of said platform.
That the entity that operates the platform through which you want to invest is registered with the regulatory entity in your jurisdiction is the first risk to consider. Some operators require a license to act either as broker-dealers or investment advisors. It is even necessary that said platforms, although they do not require charges to operate in their territory, these licenses are mandatory in the jurisdiction in which the investor is located. Otherwise, they would be committing illegality, which would affect the operation in question.
In most cases, the platforms that offer investments through the Internet have automated advisory services for their clients. This, in turn, entails another series of risks to take into account, some of them intentional, such as the programming of algorithms that direct the investor towards a series of investment options that generate a higher commission for the promoters of the platform.
Likewise, the investor may come to believe that the online advisory service is good enough not to require human presence, which may derive from a lack of knowledge on the client’s part of the services and limitations of the same that they are acquiring. As part of this lack of expertise, tax implications, insurance planning, market corrections, among other considerations that the automated system does not consider and that could be more appropriate for the client, can be found.
IOSCO adds that even an investment consultant can ignore some questions to have all the necessary information to fully understand his client’s situation and offer the investment option that best suits his requirements or needs.
When this process of creating the profile of the investor is left in the hands of an automated system, which has a limited series of questions to know the person, and without the capacity to incorporate unusual situations of the clients, the conclusion is that the risk that the person is taking when investing online is greater.
Information Is King
Leaving aside the investment platform, the next thing to consider is the investment itself. When investing online, you are exposed to a lot of information about the best options when placing capital, so it is essential to know these companies. The Federal Trade Commission of the United States (FTC, for its acronym in English) advises to exhaustively verify the promoters and directors of the company to make sure that they do not repeat offenders in some fraud.
The verification of the information does not stop there. Although the company you want to invest in is not involved in any fraud, this does not automatically mean that it is a good place to invest. So the next point to keep in mind is to verify and contrast the sources of information and what is said about the company.
“A company or its promoters can very easily make grandiose statements pondering new product developments, lucrative contracts or the strength of the company’s financial state (…). Never, ever make an investment based solely on what you read in an email newsletter or other information published in a newsletter or blog,” the FTC warns.
Likewise, the FTC reminds that many small companies cannot meet the requirements to operate nationally (in this case in the United States), so these shares are traded on over-the-counter markets or secondary markets and are listed through over-the-counter systems like the Pink Sheets, immortalized in the movie The Wolf of Wall Street; such operations are usually the riskiest and the most susceptible to manipulation. Therefore, knowing the history of these companies is essential when reducing risks when investing online.
Fraudsters likely hide behind these types of companies. That is why they also call to be skeptical with the references given of a company or investment. Even if an advisor maintains that a certain asset is correctly registered with the relevant agency and provides the contact number so that the investment information can be verified, the reality is that they will sometimes give the name of the real agency. Still, at other times the same will be invented.
In any case, even if the agency exists, the contact information provided would be false. That is, if you call the phone number provided by the promoter, instead of contacting a government official, you will speak with one of the scammers or one of their colleagues, who will give the best references about the company, the promoter or the transaction.
Contrary to what one might think, the information seen when making investments through the Internet is not necessarily in real-time, so when you click on the operation, the price of the same is not the one seen on screen. The rapid fluctuations in the stock market today are one of the reasons why the price you see is not the same as what you can access.
This is because there is a time lag in transactions most of the time, which may be due to having access to order online or receiving order confirmations.
In general, the prices of the securities that can be seen on the screen have a lag of between 20 and 30 minutes, so this difference in time can end up affecting the conditions of the transaction. So that there are no surprises between the desired price and the final price of the operation. It is convenient to establish a buy or sell order with a limited cost or price range to avoid losses due to significant and sporadic fluctuations in the market.
Likewise, it is advisable to have alternative means at hand to carry out the transaction, such as telephone contact. Verification is again important, in this case of the operation. It should not be assumed that it will materialize by the simple fact of having placed the order to buy or sell securities on the platform or the system. The same principle applies when canceling a purchase or sale order, and it must be verified that it has been carried out.
The technical elements cannot be left aside when discussing investment options in the network. Problems with the computer, modem, or Internet service provider, both of the investor and the electronic broker, can prevent a certain transaction from being carried out. In addition, the high traffic of users is another element that can affect the speed of the connection, with it the efficiency of the service and the result of the transaction.
While, about the hardware used for these investments, it is essential to keep security programs, the Internet browser, and the operating system fully updated to avoid exposing information that criminals can exploit when investing online.
Finally, other risk elements must be taken into account when making investments through online platforms. For example, inadequate controls or infrastructure to update or test the virtual portfolios within these systems; lack of understanding about potential conflicts, the structure of charges or incentives, and risks related to the products and services; lack of clarity between real information and investment advice provided by the platform, to name a few.
Two elements have been combined in recent years that boost investments on the web. The first of these is undoubtedly the COVID-19 pandemic, which has forced millions of people to spend more time in virtual contexts. The second is the proliferation of platforms to carry out the investments above and their promotion.
This situation has put people in front of a scenario where digital tools add a new ingredient. Said ingredient is social networks. Discussion forums and social networks are often places where investors, especially less experienced ones, go to gather opinions on what the best moves to make in the market can be.
Likewise, when all this information to which the investor is exposed is added to new tools that incorporate metadata and artificial intelligence, a scenario based on social networks is created regarding the best options for investing on the Internet. However, the risks inherent in this novel practice must be considered.
Firstly, in discussion forums and social networks, pressure can be exerted on inexperienced investors, claiming that a certain asset presents a unique opportunity at that moment. As they are unverified sources, there may be certain interests behind said advice that are not necessarily aligned with the investor’s future.
Social Media Feeling
Social media sentiment is the data collected on social networks that specialized companies sell to corporations and financial institutions. This information usually includes language processing, combined with machine learning and social network analysis to identify key investors’ “sentiment” or perception regarding investments in the market.
For example, this type of platform can show, through fully prepared data, the decrease in the perception of risk that the market sees in the face of a certain commodity or asset.
However, as with the rest of the technological platforms, errors in the preparation of the tool’s algorithm are risks that investors face. In addition, being social networks, the analyzed information is not verified, or there may be an erroneous reading of the analysis companies due to simple facts such as the fact that the data collected comes from old tweets that are being used. Retweets.