Digital Evolution in Trading: Everything You Need to know

One area of the industry that has changed almost beyond recognition since the digital age is the world of trading. Using computers has revolutionized how deals are made as well as creating entirely new markets.

The increased use of IT in our world has changed pretty much every aspect of what we do and how we do it. The internet and the ‘technology of things’ has meant that we can all work smarter and harder, as well as making lives easier for ourselves in many areas. For example, setting reminders in our calendars to purchase gifts or even automate the purchase of gifts each year. Many of us do our grocery shopping online, conduct holiday research online and talk to friends and family via video call on a frequent basis.

One area of the industry that has changed almost beyond recognition since the digital age is the world of trading. Using computers has revolutionized how deals are made as well as creating entirely new markets. Take for example cryptocurrency. That asset simply could not have existed before the invention of the highly advanced computers that mine e-tokens.

But what is the impact on investors of the evolution of digital trading? Understanding the answer to that question can help potential investors better understand what makes the best trading platform (for UK investors).

What Are The Ramifications of The Evolution of The Digitization of Trading?

AI Has a Big Impact on Many Strategies

Artificial Intelligence has been a game-changer for many types of investors out there — sometimes in a good way, sometimes in a bad way. High frequency trading, in particular, has been impacted as computers make swift work of calculations that would usually take a person an extraordinary time to make. The result is that high frequency trading is actually even more competitive as these types of traders try to ensure they have the best technology available to them that makes the best-informed trades. For those that cannot compete, a move away from this strategy to a longer term outlook may mean it takes more time to realise returns, but at least those returns can be made.

Also Read: Investing in Tesla Stock (TSLA): Things You Need to Know Before Investing

Greater Transparency

One of the ways that AI can make trades so quickly is that it is able to take in a huge amount of input from many different sources. One of the reasons for that is that the digital evolution of trading has meant that there is far more information available to investors at any one time. Markets move quickly and react quickly to information which then, in turn, makes the market even quicker and more transparent. Transparency is often seen as a good thing, though it can make taking positions that will reap rewards a little more difficult — given that so many other investors have exactly the same information at their disposal.

Drill Back to Fundamentals

For that reason, it can be a good idea to return to the fundamentals of investing which all that information should support when it comes to decision making. If an investor takes the long term view that a company currently has the potential to grow, due to healthy profits and sales that look set to continue, and that it has a competent leadership team and the ability to cope with headwinds that come its way, that company is still a good investment — whether other investors (backed by AI or otherwise) have picked up on it earlier or not. Obviously the cheaper it is bought the better. But that can sometimes make investors hesitant to buy a stock, knowing that the price has already risen since it has been on their radar. If it still has the potential to grow, it still has the potential to earn investors a return over the long term — even if other high-frequency traders or investors with different strategies cause the price to fluctuate in the short term.

Reduction in Trading Costs

A big impact and benefit to the digitization of trading are reduced trading costs. That is great news as it means investors can trade more and not be so beholden to broker fees eating into returns. Additionally, it has further helped the improvement of technology. Costs have been reduced due to new entrants to the market, not to mention cheaper ways of doing things. These two ideas work in conjunction together — bettering the technology all the time and this further driving down costs as there is more choice available. Execution times have gone down too which also helps in the overall cost of running a portfolio as it is more streamlined and efficient.

The Rise of The Retail Investor

Due to the proliferation of online trading platforms, there has been a huge increase in the amount of retail investors out there. In a very short space of time, retail investors were able to enter the market in such numbers that they can affect the price of stocks in a way that was only available to institutional investors in previous decades.

The recent rise and falls in the price of GameStop — a previously failing company and stock — was entirely down to retail investors working together in such numbers that they affected the positions of massive hedge funds. Headline stories aside, what is a good thing about the proliferation of trading platforms for retail investors is that any person can take hold of their finances and grow their wealth. By using the best trading platforms in the UK or even worldwide, people are now able to take advantage of the markets in a way that has previously only been available to the already wealthy.

Know Your Risk Profile

It has, as a result, never been more important to know and understand your risk profile. Your risk profile will help you calculate with certainty your ability to take on risks as well as your risk. Given how quickly the market can change in our digital age, knowing what and how you could or should invest is critical. Doing so materially improves an investor’s ability to protect their downside while ensuring that their upside is maximized when taking advantage of investment opportunities available to them.

The Digital Evolution of Trading

The digital evolution of trading has been nothing short of revolutionary. Investors can now move on to new market information quickly and make use of more market information than ever before. It has meant that markets have become more transparent and more accessible to more and more individuals. While some will prefer the good old days, where pit trading was the method of the time, being able to execute quickly on a position means that people are able to take more ownership of their financial wealth to improve their financial health.