It all started so promisingly for the generation of armchair traders that emerged during the Covid lockdowns. How have they responded to the chastening experiences of recent months?
Office workers are heading back to HQ in their droves, bitcoin has taken a tumble and the stock markets are no longer looking anything like a gold mine. Does this mean that the many thousands of people in the UK who took up trading while at home on furlough have logged off their trading platforms permanently and slunk away from their screens with their tails between their legs?
Not exactly, according to Leon Gauhman, co-founder and chief product and strategy officer of digital transformation consultancy Elsewhen. He believes that a significant proportion of retail investors have emerged from the experience months older and wiser.
“Combined with record inflation, quantitative tightening, increased interest rates and the effects of the war in Ukraine have contributed to a much harsher economic climate,” he says. “Credit Suisse estimated that amateur retail traders accounted for 30% of US stock market activity at times last year. That exuberance has evaporated as they’ve gone from trying to spend free money to needing to budget to eat. This April, for instance, retail trading was down by 20% on the manic activity seen in the early months of 2021.”
But the two key forces that drove gen-Z investors to seek alternative ways to make money – low interest rates and high house prices – still haven’t eased significantly. Now that they’ve had a taste of success, many lockdown traders will continue, seeking knowledge through social media channels such as YouTube and TikTok.
Demystifying the markets
Max Rofagha is the founder and CEO of Finimize, a financial community platform giving DIY investors the tools and information they require to make smarter decisions. He notes that, although retail investors have become less active in recent months, they are still trading twice the volume of stocks than they had been before the pandemic struck.
“Many among us would have expected retail investors to run for the hills as soon as the market sell-off happened. Instead, they are sticking around, hungry to learn more and shifting their monthly investments to less risky options, such as index funds,” Rofagha reports.
He predicts that the next wave of innovation in this segment will focus on providing information that demystifies the stock market. While headlines describing DIY investors as ‘dumb money’ were probably unfair, it has become clear that their education needs to be improved.
“Modern investors come with a different set of habits,” Rofagha notes. “They need everything to be bite-sized, mobile and social.”
Michael Kamerman, CEO of online trading platform Skilling, has been calling on regulators such as the European Securities and Markets Authority to prioritise investor protection as it pushes its financial education plans forward with the aim of teaching the masses.
“Retail traders will often see their favourite celebrity endorse a cryptocurrency on Twitter and be inclined to invest as a result. By doing so, they buy into the clickbait nature of financial influencing online and put themselves at increased risk of nursing potentially large losses,” says Kamerman, who adds that he has observed a distinct dampening of enthusiasm among DIY investors in recent months.
David Morrison, senior market analyst at Trade Nation, notes that “volatility is exciting, but also incredibly dangerous. Those who actively bought and sold from the late spring of 2020 until the beginning of 2022 were probably laughing at how easy it was to make money. In fact, there were some notable characters who appeared on TikTok ridiculing old-time investors like Warren Buffett.”
A lot of furloughed retail investors were fortunate to start trading just as a bull market was taking hold, but it wasn’t long before their lack of experience worked against them.
“Many people did make money over that period, but it’s likely that far more didn’t,” he says. “And then the markets stopped going up. Since the start of this year, trading has been much harder.”
While plenty of retail traders went into the markets with their eyes open, many were not prepared for the protracted sell-off. Those that held on have learnt some valuable lessons, according to Morrison.
“They have grasped the importance of money and risk management, as well as how to take probabilities into account when trading,” he says.
DIY trading is here to stay
The surge in retail investment over the past couple of years has left lasting effects on brokers, in terms of both their trading infrastructure and client demands, according to Amanda Harrison, senior sales executive at Adaptive Financial Consulting.
“The arrival of the pandemic instigated a surge in online day trading, which meant that the number of accounts jumped significantly. Many brokers did not have the infrastructure to support the boom, which caused temporary system failures and outages in some cases,” she explains.
Having acquired a larger pool of accounts held by relatively inexperienced traders, many of which have gone dormant, brokers are considering ways to use third-party tools to reactivate and educate their client base.
Sami Osman, co-founder and CEO of Quartr, an app designed to make corporate financial information more accessible, considers the surge in retail investment at the start of the Covid crisis to have been an unprecedented – and wholly necessary – change.
“It gave rise to platforms that facilitate all stages of the trading process,” he says. “Until last year, retail traders were more focused on buying a specific stock than studying that company’s fundamentals. Then there was a clear shift.”
While the economic situation has changed dramatically over the past quarter, the technological trends that helped to power the rise of retail trading are here to stay, according to Gauhman.
“Deterred by bruising losses, some amateur traders will undoubtedly give up. Others will learn from their mistakes and keep trading,” he says. “Wall Street shouldn’t breathe easy just yet.”