Impact of App-based Trading on Market Liquidity

By Parul, Correspondent  |  Wednesday, 23 October 2024, 06:50:50 PM IST

Impact of App-based Trading on Market Liquidity

With the invention of advanced mobile trading apps, stock trading has undergone a revolution in its approach. This is because these applications encourage more users to participate in trading, resulting in the flawless process of buying and selling the stocks. This article will help you to understand the effects of these mobile applications on stock market liquidity in detail.

What is Market Liquidity?

Market liquidity refers to how easy it is to buy or sell stocks without altering the prices. When a marketplace has a favourable degree of liquidity:

  • There are a large number of market participants
  • The transactions are done instantly
  • There is a very small price variation between the execution of trades

How Do Trading Apps Increase Liquidity?

Trading applications tend to provide several improvements in the levels of market liquidity.

  • More Trades: Trading apps bring a lot of new traders into the share market, which increases the number of buying and selling of shares and other financial instruments available.
  • Faster Trades: People can trade anywhere, anytime, with their phones, and with this flexibility, they can expect an increase in the volume of trades.
  • Smaller Trades: Most of the apps allow people to buy even a portion of the shares, which means that many people, regardless of how much capital they have, can trade.
  • Information Counters: These applications also offer real-time information, which helps in the decision-making processes of the traders.

For instance, news announcing a shift in Yes Bank share price is updated in the app. Traders can take advantage of this information and perform trades effectively.

Rise of Trading Apps

Trading applications are more in use today. They allow people to trade shares of companies using their smart- phones. Some reasons that can explain the rise of trading apps include:

  • User friendly interface
  • Zero or very minimal commission on trades
  • Fast opening of the account.
  • Availability of current stock quotes and news.

Many traders have come into stock trading because of trading apps. This surge of traders has affected the market liquidity.

Understand Market Volatility Risks

While a trading app can increase liquidity, it might also cause some problems:

  1. Quick mood changes: When many app users react to the news at once, it can cause big price swings.
  2. Less experienced traders: Many app users are new to trading and might make hasty investment decisions.
  3. Herd behaviour: App users might copy each other's trades, causing unnecessary price movements.
  4. Technical issues: If an app has problems, it might suddenly reduce liquidity.

Impact on Different Types of Stocks

Trading apps don't affect all stocks the same way:

  1. Popular stocks: Well-known companies often see increased liquidity. Their share prices might change more often but in smaller amounts.
  2. Small company stocks: These might see big price changes if they suddenly become popular on apps.
  3. New stocks: Initial public offerings (IPOs) might see more early trading thanks to easy app access.

How This Affects Traditional Investors?

The rise of trading apps has changed things for long-term investors too.

  1. Price information: Trading app gives a clearer picture of what the current market price of the stock is.
  2. Harder to buy large amounts: Investors might find it harder to buy many shares at once without affecting the price.
  3. New investment strategies: Some investors now try to predict and use app trading patterns.

Regulation and Safety

As trading applications continue to evolve, regulatory frameworks are also adapting. In India, the Securities and Exchange Board of India (SEBI) oversees these platforms to ensure:

  • Clear communication of risks associated with trading
  • Protection of user data and privacy
  • Fair trading practices for all participants
  • These regulations are designed to safeguard the interests of both novice and experienced traders alike.

Future of App-based Trading

Trading applications are expected to continue evolving in response to market trends. We may observe:

  • An increasing number of users engaging in trading via these platforms
  • The introduction of new features to assist in trading decision-making
  • Enhanced risk management capabilities

As these applications develop, they have the potential to further enhance market liquidity while addressing existing challenges.

Conclusion

Trading applications have significantly transformed stock market dynamics by facilitating greater access and increasing liquidity. However, they also introduce new risks and volatility that investors must navigate. Selecting a reliable trading platform, such as BlinkX, which provides robust security and advanced analytical tools, is essential for making informed decisions. As app-based trading continues to evolve, both novice and seasoned investors must stay informed to effectively adapt to these changes in the market landscape.

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