S.you are young, you risk a lot, you invest – and you are becoming more and more influential. A new generation of traders has grown up over the past few years and grown up online. The corona crisis has now made her fully fledged. While private investors played a subordinate role in the markets for a long time, they literally flooded the markets as a result of the corona stock exchange turbulence. But what are the consequences of the democratization of the markets that we keep talking about? Do informed and self-determined investors use the markets or does the risky trading of day traders lead to irrational price bubbles in the market?
In the first half of 2020, individual investors were responsible for almost a fifth of all transactions in the American stock market. This is an estimate by Larry Tabbs from the research platform Bloomberg Intelligence. That was around 5 percent more than last year, and a good twice as much as ten years ago. Joe Mecane of Citadel Securities, a market maker for brokers, even assumed in an interview that around a quarter of the total trading volume came from private investors on individual days.
170 percent more users
There are no exact numbers. However, when asked, neo brokers such as Etoro, Trade Republic or Nextmarkets report an increase in customers or trading activity during the Corona crisis. Etoro was able to gain 170 percent more users compared to the previous year in the first half of the year. And Fintech Trade Republic, financed by star investor Peter Thiel, also reports some “peaks” in trading activity during the pandemic. Manuel Heyden, head of the broker platform Nextmarkets, says that customers were able to enter the markets cheaply due to the market turbulence, but also the increasingly cheaper trade.
The trading platform Robinhood, which is particularly popular with young investors in America, got the ball rolling when it first introduced free trading a few years ago. In doing so, the company has also forced industry giants such as broker Charles Schwab in America to reduce trade to almost zero.
“In my opinion, the broker price war has reduced inhibitions,” says Boris Strucken about the entry of many private investors into the stock market. He is head of the banking division of FIS in Germany, a financial technology company. The fintechs have contributed to making the markets accessible to every user, says Strucken. The digital offerings have actually revolutionized the world for individual investors. “Investors have become more self-determined.”
Speculative trades are one of them
20 or 30 years ago you paid a lot of money to buy stocks, says Etoro’s Germany boss Dennis Austinat. With 15 million users, the Israel-based online broker is one of the largest trading platforms for private investors in Europe. Back then the bank was king, today it is the customer, so Austinat.
Since every investment is associated with risks, one pursues a “responsible investment policy”. The fact that some users also try speculative trades is also part of trading. However, users would be encouraged to think about long-term strategies and understand what they are investing in and only invest amounts they can afford to lose.