Trading apps could be putting as many as 1.6 million adults at risk by promoting high-risk investments, the financial watchdog has warned.
The Financial Conduct Authority (FCA) says some platforms are ‘gamifying’ trading, potentially leading customers to take on investments that aren’t right for them.
The regulator’s review has raised concerns about how they operate and the types of financial products they offer.
Here, we explain how these apps work, the kind of investments to watch out for, and why they can be so risky.
Please note: the content contained in this article is for information purposes only and does not constitute financial or investment advice.
What are trading apps?
Though they’re often confused, trading and investing are two very different strategies for making money from the stock market.
Investing is typically a long-term approach. It’s about building wealth steadily over time – for example, by holding shares or funds for several years to support future goals like retirement.
Trading, on the other hand, involves buying and selling financial assets much more frequently – sometimes multiple times within the same day. Traders try to profit from short-term price movements. It is generally much riskier than long-term investing.
Trading apps are platforms that make this kind of active trading easy to do from a phone or tablet, without needing to use a traditional stockbroker. They’re aimed at people who want to manage their own trades, often called ‘DIY investors’.
Many apps are low cost – with some offering commission-free trading – and give users access to a wide range of financial products. These include shares, funds, foreign exchange (forex), cryptocurrencies, and complex investments.
- Find out more: best investment platforms
What has the FCA said?
In its recent review, the FCA found that several of the trading apps it reviewed were offering complex products such as cryptocurrency and contracts for difference (CFDs) – typically designed for professional or institutional investors – to people without the necessary experience or knowledge.
It said that while some firms had strong processes in place for assessing customer understanding of high-risk investments, others lacked adequate checks.
In a separate research paper, the FCA highlighted the dangers of trading apps which use digital engagement practices (DEPs) – features like push notifications, prize draws and leaderboards – designed to keep investors engaged with the platform.
The regulator found that users of apps with more of these gamified features tended to earn lower returns, largely due to trading high-risk products such as crypto and CFDs.
That said, the FCA noted that all firms reviewed showed some awareness of the need to use digital tools, like notifications, responsibly.
High-risk investments to watch out for
Without the right guidance on how much risk to take on, some people may end up taking on more risk than they realise and face unexpected losses.
Here are some of the investments that can be especially risky for beginners:
Cryptocurrency
Cryptocurrencies, the most famous of which is Bitcoin, are a form of currency that aren’t controlled by any country or central bank.
The value of cryptocurrencies is extremely volatile, often spiking and crashing without warning.
Beyond the high risk of genuine cryptocurrency investments, the area is rife with scams. These often use fake celebrity endorsements – recent examples include Martin Lewis and Jeremy Clarkson – to promote investments with unrealistic returns.
- Find out more: cryptocurrencies explained
Contract for Difference (CFD)
When you invest in a CFD, you don’t own any underlying asset. Instead, you bet on whether it will gain or lose value. CFDs are illegal in Belgium, Hong Kong and the US, and have been heavily restricted in the UK since 2019.
One such restriction is that if you go to invest in a CFD, you’ll receive a warning along the lines of: ‘70% of retail investor accounts lose money when trading CFDs with this provider’.
- Find out more: 4 investments to avoid if you’re a beginner
Spread betting
Similar to CFDs, spread betting lets traders speculate on the direction of a market without owning the underlying asset. You place a bet on whether the price will go up or down.
Unlike CFDs, which don’t have a set end date, spread bets usually come with a fixed expiry date.
Venture capital trusts (VCTs)
Venture capital trusts are a type of trust that invest in private equity. They offer 30% income tax relief on an initial investment of up to £200,000, tax-free dividends and no capital gains tax on profits.
The catch is that you’re more likely to end up with no returns to claim tax benefits on. FCA says only ‘sophisticated investors’, with more than £250,000 to invest and annual incomes higher than £100,000, should use VCTs because of the much higher likelihood of sustaining big losses.
Unlike public companies, private companies aren’t required to provide regular detailed financial statements, so you’re less likely to know if your investment is in trouble and be able to get out before it collapses. The chance of a business collapsing is far higher for less-established companies.
- Find out more: investment trusts explained