Stock market volatility tests the mettle of amateur investors

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.”