By Adam Lloyd
Back in January a group of self-styled Robin Hood share traders used the Reddit platform to unleash the power of social media to drive up the share price of the struggling US video game retailer, GameStop. The apparently underhand shenanigans of share traders on Wall Street hit the headlines as the shorting activities of one overly aggressive hedge fund were exploited to force a bear squeeze and send the GameStop share price through the roof.
The news of the fantastic returns made by small investors while taking on the established Wall Street giants went global and pretty soon everyone interested in making a quick profit was looking to repeat the trick. In an earlier article – here – I pointed out that one of the big problems with this is the potential for inexperienced investors to get caught up in the excitement and end up losing a great deal of money, if not everything.
The FCA, the UK’s financial regulator, knows this is not a new phenomenon. Every bull market draws in more and more buyers as it rises. What is new this time is the ease with which new investors can buy and sell shares without any knowledge of the markets or asset class they are dabbling in.
In the case of GameStop, the shares jumped by 1,500 percent hitting an all-time high of US$483 before falling back to below US$50 in a matter of days. Even today, following management changes and hopes of a turn-around in the performance of the business the shares have been volatile – in just a month they have bounced from US$50 to US$265 and back to US$182. In unpredictable markets like that even experienced professional traders can get cleaned out so what hope is there for eager amateurs?
For many the pandemic has meant more time spent at home in front of the computer. Restless minds with spare time have been eying opportunities to use the money saved by not going out to make a few quid in the stock market or in cryptocurrencies or anything else that seems to be flying.
To better understand what is happening the FCA commissioned market research on the legion of new private investors who have begun trading in shares, cryptocurrencies and derivatives. The various platforms that offer access to these markets have been reporting big increases in both the number of traders and the frequency of their trades. Activity levels from retail investors have never been so high.
The findings of the research were both surprisingly positive and worryingly bad. The surprisingly positive is the emergence of a more diverse investment community that is increasingly female, younger and from ethnic minorities rather than the more traditional middle-aged men. The large IFAs and retail broking houses have seen the average age of their client base falling rapidly. This increasingly young and diverse client base is also coming from a broader socio-economic cross section and are likely to be less well educated and may even be unemployed. More people taking an interest in investments and saving is a good thing especially if they understand the risks and are willing to take a long term, patient approach. That’s not what we saw with GameStop.
The worryingly bad is that almost half of these new investors don’t think that they are at risk of losing money. They see the much hyped returns of celebrities and their peers and believe that they too can make easy money. The report noted that 78% agreed with the statement: “I trust my instincts to tell me when it’s time to buy and to sell.” Even more worrying for the FCA is that the same number agreed with: “There are certain investment types, sectors or companies I consider a ‘safe bet’.”
The FCA are concerned that a great many of these new players are young, impulsive and self-confident with no previous experience of losing money to guide their decision making. Having only experienced a bull market they don’t see their money as being at risk and are more likely to lose everything.
This new cohort of investors are more likely to use social media for the majority, if not all, their news, investing advice and recommendations and will be introduced to new trading platforms and investment apps this way. The FCA worries that some investors may be vulnerable and not know or understand the risks they are taking. They see online and TV adverts tempting people who wouldn’t otherwise bet on shares by implying there are safe bets and referring to the amazing returns others have made. The plethora of new trading platforms and investment apps are also offering high risk leveraged bets on share prices and cryptocurrencies where even a small change in price can wipe out everything.
In many cases this is not investing it is just another form of gambling and to counter it the FCA is launching its “disruptive” advertising campaign whereby its warning adverts will appear whenever people search the internet using terms like “best stocks to trade”. Let’s hope the campaign is effective although the audience they are targeting is well known for its distrust of establishment figures so it might be an optimistic hope.
Every Bull market ends the same way: small investors lose more than they can afford, politicians inevitably get drawn in to another stock market scandal and demand something be done. Governments are then forced to respond in the only way they can by passing new laws and drawing up more regulations to protect people from losing it all in the future. The FCA will, no doubt, do all they can to protect the inexperienced investors from making big mistakes but the Government will also need to look again at the difference between investing and gambling and they may need to do it soon.
Bull markets end when there are no new investors left and the clear signal for that moment is when Grandmother tells you which shares you should be buying. At that point the professionals are long gone and the only people left are the small investors who often stand to lose everything.
Last week one of my wife’s colleagues, a brilliant intensive care nurse, told her to buy Bitcoins! “What’s a bitcoin?” asked my wife.
“I don’t know but my brother-in-law told to buy some and I’ve already made £2k.” was the reply