The Predatory Gamification of Investing

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The growth in popularity of zero commission brokerages has allowed many first time investors to enter the market without having to pay costly brokerage fees that would have made their investments pointless in the first place. Before platforms like robin hood the industry standard for stockbrokers was to charge a fixed percentage of every trade made on both the buy and the sell side normally 1-2% for orders over $5,000.

This business model usually included minimum brokerage fees that could be as high as $50 per trade so someone who only wanted to invest $100 a month would instantly be 50% down on their position the instant they entered the market, they would also lose another 50% of their initial investment when they exited the market because broker fees were charged on both the buy and sell side. Stock brokers got a bad reputation for encouraging their clients to trade as much as possible often based of dubious stock tips all in order to get as many trades through their desk as possible, because more trades meant more fees and more commissions for the individual brokers on the other end of the telephone.

This is what was depicted in one of the early scenes in the world of wall street when Jordan Belfort was a rookie on a trading floor. His job was to try and connect licensed financial brokers like Matthew McConaughey with high net worth investors so that the brokers could talk them into making a trade and collecting their fee along the way. When Belfort went to his job interview at investor centre and talked about making 1% commission at LF Rothschild that’s what he was referring to.

The fees that stock brokers charged were high, but at the time they were not entirely unreasonable. In the days before automated trading settlements. Back then the clients buy or sell instructions had to be given to individual traders on the actual stock floors of exchanges around the country, so it made sense that clients covered these costs with some margin so that the brokers could still turn a profit by providing this service. But then along came automated settlements which meant that now most buy and sell orders don’t interact with any humans at all apart from the people on either end of the trade. Cutting out all the people in the process reduced the expense of facilitating stock trades which allowed brokers like robin hood to come along and offer trades completely for free.

For most traders commission free brokerages are a much better alternative to the more traditional brokerages that for some reason still think it’s fair to charge normal retail traders fees of up to 2%, but they are also not charities, the major commission free trading platforms are multi billion dollars companies, which means they have found other sneakier ways to extract money from their clients. There are several hidden costs to using these platforms which means that just like the Jordan Belfort style stockbrokers of yesteryear, they are making money off novice investors every time they trade, and the more trades they get people to do the more money they make. The only thing that has really changed between then and now is how they make their money and the strategies they are implementing to get people to trade as much as possible, and that’s by turning the whole process of investing into a giant game where instead of making diligent and consistent contributions to a well thought out portfolio, investors will instead play for high scores complete with confetti animation while using financial instruments that they should not reasonably have access to.

So it’s time to learn How Money Works to find out how the gamification of investing is costing average people billions of dollars every year and why people keep falling for these tricks.

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#finance #investing

Edited By: Andrew Gonzales

Music Courtesy of: Epidemic Sound

Select Footage Courtesy of: Getty Images

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