Higher risk appetite, younger traders and bets made on the basis of social media sentiment were themes that characterised trading at the height of the pandemic
The coronavirus pandemic caused some well documented and previously unimaginable consequences to the nation’s mental, physical and financial health.
Yet, while daily news headlines often referenced those in financial hardship during the outbreak, there were many in society who were able to improve their disposable wealth.
Figures released by YouGov at the end of March 2021 revealed that around a third (32 per cent) of people in the UK had actually managed to grow their savings during the pandemic.
However, the interest rates on savings accounts have remained low and people are now exploring other places to put their money, according to Simon Crookall, a former bond trader who founded retail site InvestEngine in 2019.
“The surge in sign-ups to trading apps during the pandemic has shown that people are prepared to put their money in the stock market even in a time of uncertainty,” he says. “For those who don’t need to keep this cash on hand, or plan to spend it, investment could certainly be worth considering.”
Exploring opportunities in trading
Given the low interest rate environment and the volatility in stocks throughout the crisis, investors have been keen to explore opportunities, according to experts at the various retail brokerages.
“By causing significant fluctuations on the stock market, COVID has put investing on the public agenda,” says Anna-Sophie Hartvigsen, co-founder and partner of Female Invest.
“As a result, people are joining the stock market at unprecedented rates, hoping to get in at the right time. This can be seen as an expression of an increased risk appetite, where investors are willing to gamble for short-term gains.”
For many, the pandemic has redefined how they think about investing. The significant stimulus measures from governments around the world shaped the performance of equity markets. It meant a whole host of individual sectors and stocks returned double-digit returns in a matter of days, something investors previously waited months, or even years, to see before the pandemic.
“The rapid bounce back from COVID lows inspired by significant stimulus and support reinforced the message that ‘bad news is often good news’ for the markets and that corrections or dips are to be bought,” explains Charles White-Thomson, chief executive at Saxo Markets.
Beyond short term
Joshua Mahony, senior market analyst at IG Markets, acknowledges the opportunities market corrections have afforded during the pandemic, but explains that while the initial March-April capitulation in stocks and energy markets led to some short-termist activity, the trends since have been more drawn out, allowing traders to hold on to positions for longer.
“Global lockdowns provided the basis for huge tech gains, which have only recently started to lose some momentum,” he says.
“Nevertheless, each trader will take their own approach and while one will see a trend and want to ride it for weeks at a time, another may spot specific entry opportunities that may last hours.”
For younger consumers, the frustrations of slow income growth coupled with a long-term low interest rate environment is likely to mean a greater willingness to explore what retail trading platforms have to offer.
In addition, substantial innovation in the retail trading market over the past decade has made it easier to trade through apps, to use ewallet services and explore emerging asset classes such as crypto currencies.
“A lack of access to pedigree private investments has pushed young investors into high-risk assets where there’s still upside growth potential,” says Josh Greenwald, chief risk officer at Uphold.
IG’s Mahoney agrees, explaining that the market “collapse” witnessed during the pandemic brought in a new crop of traders.
“Huge interest from younger traders seeking to take advantage of rock-bottom prices also brings a different risk-profile and investing attitude,” he says. “While the new generation of traders will often be more open to risk, that approach can perhaps shift as they move along their journey and take a more strategic approach to trading and investing.”
Some market observers at the Financial Conduct Authority (FCA) will indeed be hoping this is the case. In March 2021, the regulator issued a public notice warning that young people were investing in high-risk products that may not be suitable for them.
“We want to make sure we encourage the ability to save and invest for lifetime events, particularly for younger generations, but it is imperative consumers do so with savings and investment products that have a suitable level of risk for their needs,” says Sheldon Mills, executive director of consumers and competition at the FCA.
“Investors need to be mindful of their overall risk appetite, diversifying their investments and only investing money they can afford to lose in high-risk products.”
It is clear the shifting profile of retail traders is of interest to the regulator, but their age profile isn’t the only issue being monitored.
The recent spike in previously out-of-favour stocks such as US retailer GameStop and tech firm BlackBerry led to the regulator warning traders about the dangers of high-risk trading based on social media sentiment alone. Despite this, the media attention these events attracted fuelled interest further. Since then a host of companies have come forward to warn their own customers of trading without sufficient information.
“This is a risky approach to investing,” says Crookall of InvestEngine. “We’d urge people tempted by such opportunities to consider their own situation and build diversified, long-term portfolios. Many people need more guidance on risk, rather than just diving headlong into what can be very choppy waters.”
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