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Impacts of New Retail Investors

Updated: Jan 11, 2021

Since it’s inception, Robinhood traders have had the powerful tool of being able to trade stocks without being charged commissions or fees. However, while it changed the industry for retail investors, the typical suits of Wall Street didn’t think to give it much attention.

Now, Robinhood is changing how the market invests in stocks. The mob mentality coupled with the COVID-19 pandemic has led to an almost complete overhaul of how people invest.

Robinhood traders

Quarantine Hijinks

What young retail/Robinhood traders have been doing to disrupt markets…

The best example of this is the idea of buy the dip, where investors want to buy stocks that got hurt during the pandemic with the belief they will just jump back up when the markets return.

Becoming almost a social trend, investors are buying anything they can get their hands on with the idea that the stocks will all simply rise back up with the markets. This mentality has led to shocking market movements.

For example, Hertz’s stock jumped from $0.55 to $5.53 a share, an increase of nearly 900% over a period of 2 weeks. What makes it so notable is that despite the company filing for Chapter 11 in May, stock prices rose at such a high rate.

Hertz stock

Similarly, Airline stocks have risen from 10-40% since March, despite travel restrictions and the pandemic. Analysts have predicted that it will be at least 5 years until travel returns to where it was in 2019.

Additionally, since it costs very little to put in the orders of buying and selling, retail investors are doing it, rapidly-inflating stocks wildly. As a result, markets are going up and down so much that the charts look like a child-drawn mountain range.

So, Why Bad Stocks?

Young retail/Robinhood traders aren’t buying specifically because these companies are bad…

So there are a couple of questions to answer about how we got to this stage, the first is why is so much money going into unfavorable stocks. Yes, there is the whole ‘buy the dip’ philosophy but there are good companies that will theoretically come back up, so why don’t investors choose those companies?

One answer may be price. The markets keep becoming more and more expensive which keeps making it harder for investors to be able to buy much if they don’t have lots of money to spare. It’s hard for young investors to be able to do any of these things like diversifying if they can’t even afford one blue-chip stock. That’s why troubled companies are so appealing, their price is so low that investors can buy up many shares without having to use up all their available cash. It’s never a good idea to trade stocks based on price, money is made off of performance, not share price.

In the old days, when the price was becoming too unaffordable, companies would offer a stock split. However, recently we aren’t seeing it much from companies, where firms are just opting to let the share prices continue to rise and rise, leaving young investors trying to scramble for what they can actually afford.

Furthermore, most retail investors aren’t sitting with a Bloomberg Terminal, they will only really know about the companies they hear about frequently in the news. And since the news only covers companies that are doing really well or are in big trouble, young investors can only afford the companies in trouble.

How Can This Be Fixed?

Is there a solution to this? There might be. Some of the new tools that retail brokers are offering can be the solution that these traders need.

Recently, retail investment firms have been needing to take on new services and ideas to attract new customers. With almost all retail brokers offering zero-commission trading, they need to develop more tools to make investing simpler and to attract new customers. One of the things we are seeing recently is stock slices or dollar trading.

Charles Schwab, Cash-app, Fidelity, Robinhood (still in beta testing) and other retail brokers are offering fractional shares to investors. As the name suggests, fractional shares are the ability to buy just a portion of one stock, if you don’t have enough capital to purchase one whole share. This means that investors are no longer limited to what they can afford to buy whole shares of, and can put what they can actually afford into well-performing stocks.

Another tool that is gaining traction is ETFs (exchange-traded funds). These are a collection/basket of stocks grouped together by industry, market cap, performance, growth potential, etc. For example, the Technology Select Sector SPDR Fund (XLK) holds stocks of industry giants like Apple, Microsoft, Visa, Mastercard (Class A) and yet it trades at a fractional $103.77 (6/30/2020 12:49 EST). Additionally, since these funds are based on the entire industry, they are more stable than individual stocks. They don’t carry as much risk because the success of other companies in the fund creates a safety net if one of them is falling.

ETFs have been around for some time, however, they are just starting to become more popular. The aforementioned is less risky, plus their ongoing success is making them more popular.

These tools can kind of meld together as well because if an ETF becomes too pricey, then an investor can buy a fractional share of that ETF.

It’s unclear where the next retail brokers are going, but it will likely be on this continued theme of making investing more simple and more affordable.

What Does the Future Hold with the Rise of FinTech?

The rise of Fintech has given the next generation the ability to take a more casual bank on investing. When buying and selling shares used to mean calling your broker to put the order through, investors can now open their phone and swipe the order like a tinder match. It’s actually quite a positive, the increased accessibility to the markets will mean more trading and market movement. Meaning money moves faster and investors can make more money quicker.

However, the risk is if investing and finances become overly social. Fintech companies, like Paypal and Venmo, have given transferring money a social aspect where we try and come up with something clever in the caption when paying someone back for pizza. The risk for markets is if investors forgo all the research and analysis that usually goes into choosing stocks if it ever becomes a social trend to invest in a certain way. It’s highly unlikely that investors will treat their money that casually, but there is a greater lesson. Fintech is completely changing the way we invest, and investors should be ready to change and adapt their styles.

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(Read the original article HERE)

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