You’d be forgiven for thinking the average day-trader looks fresh out of the Wolf of Wall Street, but right now you’ll probably find most of them in trackpants and slippers.
The Coronavirus pandemic has brought on a substantial increase in retail activity across the securities market, according to chief financial watchdog ASIC.
In fact, share-trading vs investing has more than doubled. That’s a lot of stuck-at-home traders.
Quite the Covid-cocktail
With sports-betting mostly off the table, casinos shuttered and the vast majority of Australians living every day as if it were Groundhog Day, an increase of armchair traders is not surprising.
Over a focus period from 24 February to 3 April, ASIC found that daily securities market turnover increased from $15 billion to $28 billion. There was a correspondingly sharp increase in the number of retail investors in the market –up 3.4 times– and a considerable spike in previously dormant accounts.
Coincidentally, Australians have also saved $1.5 billion in gambling losses following the shutdown of pubs, clubs and other gambling venues on 23 March.
Ah, the irony.
The game’s gained more players
“Many young Australians saw the Covid-19 downturn as their chance to get into the world of investing,” says Kurt Walkom, co-founder of Pearler Investments.
“Thousands have leapt at the chance,” he says. “On one hand, this is great because many more Australians are becoming involved in the sharemarket, but on the other, it’s a little scary, because a large proportion isn’t adopting a long-term ‘investing’ mindset.”
Walkom says increased sharemarket volatility may have contributed to the rise in popularity for day-trading.
“You can’t consistently outperform professionals by trading during smoko and lunch”
“The reasons for this are twofold. Firstly, less confident investors become nervous and start trying to actively manage their positions or sell out entirely. Secondly, active traders can take more positions with large intra-day swings, which increases the possibility of gains.”
“Gains are only a possibility. In fact, it’s more accurate to call them an improbability – over 70% over retail CFD accounts lose money and day-trading brokerage accounts don’t do much better,” he says.
“In the week of 16–22 March 2020, based on a sample of 12 Australian licensed CFD providers, retail client losses were just over $428 million gross (or $234 million net),” says Walkom.
Avoiding the gamble
“It fundamentally doesn’t make sense to expect you’ll be able to beat professionals with better technology, more time and specialty skills in a zero-sum game”, Walkom says.
“These circumstances are further magnified for day-trading, where high-frequency traders have such an enormous technological edge over retail traders. You can’t consistently outperform professionals by trading during smoko and lunch.”
The real difference between trading and investing
“The reason long-term investing works is that over time, economies grow, markets grow and companies grow,” Walkom says.
“The only way to avoid gambling in the sharemarket, without making managing investments your full-time job, is to be a long-term investor. The best way to do that is to invest incremental amounts in diversified portfolios, for the long-term.
“If people insist on taking a gamble with stocks, I’d recommend clearly splitting their gambling (short term) funds with their investing (long-term) funds. Break it into two portfolios. Even use two different platforms if you must.”
“Just make it clear in your head that the trading is for fun, and a punt, whereas investing is to help you achieve your long-term financial goals.”