(Newswire.net — March 20, 2021) — There was a time when the New York Stock Exchange looked like a giant bullpen where people shouted orders to buy and sell shares of stock. That was before, as HCR Wealth Advisors points out, two technological advances: digitization and digitalization.
Digitization is what we think computers do to information. It took information from our heads and ledgers and converted it into a more efficient way to store, process or transfer. And that format – that was initially recognized by room-size computers – today can be read by smartphones, smartwatches and countless other convenient devices.
Digitalization is different. It looks at how the adoption of this new technology – digitization – changes social, business and economic behavior. HCR Wealth Advisors is particularly interested in how digitalization affects investors.
How digitization affects the markets
Here are just three areas where digitization has unlocked opportunities for investors:
The cloud has improved existing systems and increased the speed of digital workflows. Without having to understand exactly how it works, the cloud has provided “cloud-enabled” applications that manipulate massive amounts of data into forms individuals can use. And its quickness safeguards valuable (and vulnerable) data from almost all cybercriminals.
Cognitive computing makes use of natural language processing, machine learning and other aspects to improve decision making. It has led to the advent of Robo-advisors. These programs use algorithms to sort through data and develop suitable suggestions, with little to no human interaction. However, these suggestions are not as tailored or personalized to an investor as those of a financial advisor such as HCR Wealth Advisors.
Blockchain technology uses encrypted blocks of data to verify transactions. It ensures that only authorized users can edit the data. HCR Wealth Advisors sees blockchain as moving the financial services industry into a new digital era with significantly reduced errors and fraud. And it has allowed for a decentralized digital currency called cryptocurrency.
What digitalization has done
Back in the late 1990s, when Yahoo Finance and other websites promised that everyone would be able to trade shares, no one could have imagined how drastic the cultural, technical and economic changes could be.
Who could have envisioned the advent of cryptocurrencies that have the power to restructure global currency markets, whether in the near- or medium-term?
Who could have imagined the power of social media – the part of the internet that democratized society’s communications and media?
And who could have imagined that the supposed democratization of investing could lead a group of people – angered that the playing field wasn’t level – to use an intelligent app and a social media platform to strike out at the inequality?
HCR Wealth Advisors monitors the effect of technology on investments on an ongoing basis.
Cryptocurrencies: their role and their future
While you can transfer your U.S. dollars digitally, that’s not what cryptocurrencies are. Cryptocurrencies utilize blockchain technology to overcome some of the shortcomings perceived to exist in today’s monetary system. Here are a few:
- Existing payment systems, including credit cards and wire transfers, are slow and subject to error.
- Cybersecurity is an ever-growing issue for financial and other transactions.
- Multiple intermediaries – such as banks and brokers – increase the cost of transactions.
Cryptocurrency transactions are fast and secure. And they do not require intermediaries because individuals control and manage their own “wallets.” (Advisory groups like HCR Wealth Advisors can explain cryptocurrencies in detail.)
Most appealing, cryptocurrencies permit the removal of the greatest intermediaries of all – the governments behind the world’s national currencies. Many individuals feel governments have usurped the power to regulate, print and spend money in a way that devalues the national currency held by individuals – leaving the individual with no voice.
Now, 12 years after the first cryptocurrency – bitcoin – appeared, the idea is reaching a critical mass of acceptance by mainstream banks and corporations. Many of the original myths have been dispelled, and the concept and utilization of cryptocurrencies are maturing. (Tesla’s purchase in February 2021 of up to $1.5 billion in bitcoin has added confidence.)
HCR Wealth Advisors will be interested to watch how cryptocurrencies roll out into the financial world. It may well be at speeds no one expected because of the massive printing of currencies worldwide to pay for the Covid-19 pandemic.
The power of social media
MySpace was created in 2003 as an online community for anyone to connect and share journals, photos, music and interests with friends. It was an innocent precursor to Facebook, Twitter, Youtube, LinkedIn, Whatsapp and other social media that have become significant influencers today.
As can be seen in any political season, social media has outgrown its role as a connector of friends. It can magnify voices, influence decisions and facilitate organization.
It is this role as an organizer that has recently touched the stock market.
The impact of free stock trading
For years, online stock trades came with a cost: a transactional cost that settled in the range of $7-$10. An investor used an online account to place a buy or sell order to be completed at the next possible opportunity. Once settled, the account also showed that transaction cost.
Online trading had changed buying corporate shares from a rich person’s game to that of the little guy as well. With time, retail trading firms started using falling commissions as a customer-acquisition strategy – something that technology allowed.
Eventually, the cost of stock trades reached zero. The question was, “How do retail stock-trading firms make money?”
The answer mirrors how social media platforms like Facebook make money: by selling information. Facebook was “free” until people realized that the company was selling their behavior patterns to corporations for use in marketing campaigns.
In the case of retail trading firms, when an investor asks to purchase a share, the firm is not going to the New York Stock Exchange to access that share. Thanks to technology, the firm can offer the transaction in nano-seconds to a “market maker” company that pays the firm for access to the order. The market maker can then use its negotiating power to make money on the transaction.
The minute difference in the spread between available bids and offers is worth the “cost” of commission-free trades to retail trading firms.
How the pandemic has changed investing
As firms like HCR Wealth Advisors see it, if the pandemic has brought anything – besides fear and insecurity – it’s boredom. And that boredom has led to a greater interest by new investors in trading stocks.
Boredom has also pushed a disproportionate percentage of online investors to buy call options instead of buying stocks. These are a leveraged, volatile and adrenaline-laden way to speculate on the stock market.
Many older investors may have remained within the guardrails created in their retirement plans with their financial advisors’ help. (That is a significant benefit of working with a group such as HCR Wealth Advisors.) But online apps have brought a new, younger generation of investors to the stock market whose immediate concerns are not retirement.
Combining technology, social media and group action
The Reddit-GameStop-Robinhood saga is known to most people, even those who are not investors. In summary, several young investors assembled in a group called WallStreetBets on the Reddit platform. They decided to attack Wall Street investors who were actively short-selling specific stocks in the belief that share prices would fall. One of those stocks was GameStop.
The Reddit traders were ready to use their options-trading skills to buy GameStop shares and call options. Using the power of a large number of small traders, they were able to influence share prices and force the Wall Street investors – primarily hedge funds – to cover their short sells. The hedge funds lost billions of dollars.
The strategy was called trolling.
The strategy worked until the investment platform handling the group’s activity (Robinhood) forced a halt in GameStop trades. GameStop’s inflated share price tumbled immediately by 372%, and angry investors are suing Robinhood. The Securities and Exchange Commission is also looking into the legality of the WallStreetBets strategy.
A new market vulnerability was discovered.
How are the markets affected by all these forces?
The pandemic has already created uncertainty at the 30,000-foot level regarding where the economy is headed, what it will look like, how fast the vaccines will allow the economy to open and how the recent $1.9 trillion stimulus bill might affect inflation.
As the stock market continues to rise, the warnings of a downward reset grow louder and louder. And rapid actions on the part of the new administration – primarily as executive orders – are affecting many sectors of the economy. Uncertainty continues to grow.
Having to factor in the effects of technology does not help:
- What will happen to the currency? Will cryptocurrency undermine the position of the U.S. dollar?
- What about the vulnerability created by the power of social media and online platforms? How can they arbitrarily affect stock prices?
- What will inflation do to the value of retirement savings?
Change seems to occur at an ever-increasing speed. While there may be some basis for concern, HCR Wealth Advisors feels there is also value in stepping back and looking at the overall picture.
At times like these, investors may want to confer with their financial advisors to ensure that all the disruptive factors have been factored into their long-term plans. Not all risks can be mitigated. But knowing that they have been considered – and strategies implemented to counter them – can go a long way to quieting the internal voices of concern.
About HCR Wealth Advisors
When least expected, something like a pandemic comes along and disrupts a plan we thought was relatively settled. HCR Wealth Advisors prepares for the unexpected and maintains composure in even the most stressful situations, ensuring their clients a clear path to the next stage of their journey.
This article is provided for informational purposes only and should not be interpreted as investment advice. HCR Wealth Advisors is not affiliated with this site.