Are online trading platforms safe? Here’s how to find out.
Online trading, or e-trading, is a method of buying and selling financial products online. Online trading platforms are platforms that help you do this with the help of smart software. In the past couple of years, the popularity and number of online trading platforms have been on the rise: Statista estimated that in July 2021, there were about 16 million monthly users of the largest online trading apps and platforms. Moreover, the size of the global e-trading market rose to 10.21 billion US dollars in 2022.
Why are online trading apps so popular, you might wonder? Well, online trading apps enable ‘normal’ people to participate in financial markets. Alongside institutional investors, everyone is now able to influence financial markets in a way that was previously unheard of. One of the reasons there was so much buzz around online trading in the past years, is because there were several events in which normal people - or ‘retail investors’, as they are called - were able to increase share prices, even though professional ‘institutional investors’ were expecting prices to drop.
A famous example of this is what happened with GameStop’s shares at the beginning of this year: on a Thursday, their shares jumped more than 8%, on top of a share price that had already increased rapidly at the start of the same week. Why did this happen? Analysts suspect that it was due to increased retail investor interest.
Examples like these illustrate how retail investors are increasingly affecting the stock market - and they have only made online trading more popular. Moreover, investing online can be a great way to earn an extra income - as long as you do it consciously ánd are using a trustworthy platform, of course.
Finding a trustworthy platform can be daunting, however, especially if you are a beginner. That’s why in this blog post, we’ll discuss some of the things to look out for when you are investigating how legitimate and reliable online trading platforms are.
Shady practices by trading platforms in the past
Before we give you some tips on how to detect a trustworthy platform, let’s give you some examples of what you could consider “non-trustworthy actions”. There were situations in the past in which trading platforms behaved dubiously, you could say.
“Gamification” of trading apps
Some trading apps are built to make trading look like a game. Picture this: if you make your first trade, a digital confetti cannon cracks up to celebrate. Critics say this can cause compulsive trading behavior, as it’s providing our brains with the addictive dopamine shot. It makes trading look like a game - like you’re playing Candy Crush, without taking any risks.
Restricting stock purchase
In 2021, one trading app decided to block the purchase of GameStop, AMC, and Blackberry stocks. At the time, users were still able to close their positions, but they couldn’t trade anymore. These stocks were very popular on the r/WallStreetBets subreddit. The relevant trading app explained on its blog that it was a “risk-management decision”, taken because of “extraordinary circumstances”. Despite that defense, at least 30 parties sued the company because they stated users lost millions of dollars because of that decision.
Needless to say, it can be very frustrating (and even loss-making) when your online trading platform freezes the opportunity to buy or sell the stocks you are looking for - especially when users on other trading platforms can access them.
Confusing financial numbers
The most tragic example is the suicide of a 20-year-old trader in 2020. According to his family, he took his own life because he thought he had lost $730,165 in cash through online trading. Most likely, the young man misunderstood the financial statements in the app: the trading app he was using showed him a ‘negative cash’ and ‘negative buying power’ of $730,165, but these are not the same as normal debt. According to a note he left, the trader decided to take his life and blames the trading app for allowing him to incur great losses - even though he had little to no income.
Though suicide may be the result of multiple contributing factors and is not necessarily the result of one single event, this tragic situation does show how important a clear explanation of financial figures is to help less experienced retail traders understand what they are doing.
Limited protection against money launderers
During the COVID pandemic, fraudsters were laundering millions in COVID relief funds through online trading platforms in the US. These funds were intended to support small businesses, but technically skilled fraudsters stole the money from the US government and were then able to launder the money by opening up accounts with different investment platforms. It was relatively easy to deposit stolen money into these accounts by setting up fake accounts with stolen identities.
How to find out if a platform is trustworthy
Now that we’ve discussed some shady practices of online trading platforms in the past, how can you make sure you are choosing a reliable platform? Here are a few things to do and to look out for.
Search for news articles
If you found a trading platform you are interested in, do your research. Of course, not all shady things will always be brought to light, but the least you can do is investigate whether the platform has ever been exposed. If you find a news article that puts the platform in a bad light, check the publish date to see how long ago it happened and what the platform did to improve in the meantime. People and platforms can change, after all.
Check user reviews
Another great way to find out if a platform is trustworthy is to check user reviews. Dive into Trustpilot, browse through Google reviews or check Subreddits, for example. Many (small) retail traders are on Reddit, where they share their experiences. You can also watch YouTube videos, TikToks, and read blog posts by financial influencers. Make sure to always think critically though: use lots of different resources and then make an informed decision.
Start with a small deposit
You don’t have to deposit thousands of dollars to see if you like a platform - on most trading apps, you can start small. Therefore, we’d suggest you sign up for your platform of choice, deposit the minimum amount and start looking around to see if you like the way the platform works. Do you like the user experience? Does it provide you with enough information and is it presented clearly? Just have a look and see if it works for you. If not, you can easily switch to another platform since you haven’t invested that much yet.
In short…
To summarize: yes, online trading platforms can definitely be safe. But whenever you are trading online, make sure to do your research extensively. This is a crucial step - not only while you are trading but also before you start.