In the last couple of months, new investors and fresh faces have entered markets all over the world. An ASX study recently used sample data from the 24th February till the 3rd of April, and a benchmark period from the 6 months prior to 4th February. During the sample period ‘retail trading as a proportion of total trading increased marginally, from 10.62% to 11.88%, when benchmarked against the backdrop of total average daily securities market turnover.’ This led to activity increasing during the sample period, observed at 3.4 times that of the benchmark one.
According to the report published by the Australian Securities and Investments Commission, “An average of 4,675 new identifiers appeared per day in the focus period.” This increase in accounts and activity has coincided with the rally since the end of February. This has led new investors believing that they can profit from the large movements as well. This is partially due to news outlets and blogs continuing to spruik that there are large profits to be made.
However, the utopian idea that a beaten-down price will always rise could have rather harsh consequences, especially as a beginner. The falls did give opportunities to purchase shares at lower levels – and for some their lowest in over 10 years. But reaching the bottom does not mean the share price will not go sideways or show the dreaded second fall. This has been the trap that some have fallen into, and something long-term investors and traders know to watch out for.
Since the virus has spread you may have read stories about some individuals getting into the market and seeing nice profits being realised. There is also the other side that does not seem to be getting as much attention, losing money.
An article published by the Tom Priscott from the BBC, recently spoke with several individuals regarding their newfound hobby. A client spoke about entering a bullish position on oil, not realising he was using a leveraged product, as opposed to the physical commodity. After his position was stopped out, he said ‘I didn’t have enough money to cover the loss, so it crashed out of my position and I got an email. I had no idea what had happened…I thought I was owning barrels, but I wasn’t, I was borrowing. It was the fastest €100 I’d ever spent.”
This can be the reality when using leveraged products and not understanding what you are trading. This was recently a large talking point, when one young man in the U.S took his life after seeing his account blow up with a leveraged position showing he owed $750,000USD. Most traders will hopefully never feel this pain, although there are other cases of suicide in the past.
Another side of the rally has been the notoriety of a day trader, the internet personality of Dave Portnoy – whose online presence is ‘Davey Day Trader’. His cult followers – most of which are sports fans – have been religiously tuning in to watch him shout and rave about random stocks he likes the sound of. The issue here is, what if someone follows this maverick without any knowledge on trading and invests more than they can afford to lose? What exactly is his experience, and how many are taking his ‘trading advice’ into the market with their real money? The professed trader started with a US$3million trading bank. Looking at his history of stock choices you can see he is trading small capitalized shares in the US, rather than large cap. With his larger than average trading bank, he may have the chance to move the stock price one way or another.
What if he has encouraged his loyal fan base to buy a share but his trade goes in the wrong direction? Davey may have sufficient capital to cover his loss, but what about the average investor? The outcome could be a loss that leaves some potential investors in financial ruin, during the worst economic downturn seen in a long time.
So, what do you do if you want to start trading responsibly? You need to educate yourself as why you are buying or selling a stock. Why would gold or silver continue to rally? Do you have a strong belief one tech company will generate a greater profit during this period than its peers? Education can be your best friend. The level and experience of the individual, or individuals, giving you advice could have a lasting and dramatic effect on your chances to survive the market. At the end of the day, we all want to make money. So why not take the time to better understand exactly what is happening instead of wasting your hard-earned money.
If you are in Australia, the best advice I give everyone is to do your research and find a company with knowledgeable and experienced individuals and a solid support base.
