The new age of investing
The world of investing has for a long time been viewed as a game most suited to older people, who have had the time to accumulate capital, or finance-oriented people with the experience to understand what is happening, and to be able to keep up with the constant volatility of trading on the share market.
But with Covid forcing everyone inside – and especially millennials looking for something to do to curb their boredom – a recent study from Investment Trends found that 435,000 Australians had invested in the stock market for the first time in 2020.
This equates to nearly 35 per cent growth in the nation’s army of retail share market investors.
Dr Angel Zhong, Senior Lecturer Finance at RMIT University, says that while Covid played a big part in the increase, the reasons go a little deeper. Zhong says the growth in new investors is driven by several factors including low interest rates, dramatic volatility in the share markets around the world, and the emergence of low-cost trading platforms like SuperHero, Stake and eToro.
In addition, she detects a hint of a replacement activity for gambling, opportunities for which were curtailed by the pandemic.
“Alongside Covid, we saw venues close, and professional sport come to a stop, so people that would usually spend their time at the likes of the Casino sitting on the pokies or placing bets at the races turned to the share market,” says Zhong.
This is no surprise, as Australia is the leader in loss per capita as a result of gambling, with Hong Kong coming in second. According to a 2018 report by H2 Gambling Capital, Australians lose about $1,324 per adult in gambling per year.
But another reason for the influx of first-time investors could be the arrival of easy-to-use apps such as Raiz, which allows investors to slowly dip their toes into the market, and figure out the best investment vehicle for themselves; and “social trading,” a way of accessing the financial markets that allows young investors to interact with their peers and replicate what other traders do.
Will these new investors be sticking around long term?
While some of the stock market newbies joined after doing research, and ensuring they were aware of the many risks associated with following the highs and lows of investing, many may simply have been looking for something to pass the time. As Zhong says, many looked at the stock market as a replacement to their previous habits; add in the rise of social trading sites and pages and these new investors will not be able to turn off anytime soon.
During Covid, people’s social media usage increased by an average of 30 per cent, which coincides with the rise of social trading.
Social Trading is a relatively new development, that allows people to no longer need to go searching for information or even really understand it themselves. Instead, on sites such as Reddit, they can read comments from fellow investors and ride the wave.
A prime example of new investors and social trading taking off is, of course, the GameStop saga. A vast majority of people would have been participating out of FOMO (fear of missing out), and not completely understanding how ‘shorting’ works, but following in the steps of a few key players on a Reddit or Facebook groups.
While it is good that more young people are getting involved in the stock market, Zhong says it would be preferable if the newbies sought the knowledge that would help them harness the market to build long-term wealth, instead of emphasizing short-term price moves: she believes investors who lack financial literacy are vulnerable to social trading and could incur losses in the share market.