Retail Investors In The Sights

Retail Investors In The Sights

over 3 years ago3 mins

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The trading universe of “retail investors” has come under fire in recent weeks, with many professionals worried that individuals are being encouraged to take aim at dangerous assets they don’t fully understand – and which risk them getting shafted.

⏰ Recap

  • After a race to the bottom on fees last year, major US brokerage Charles Schwab agreed to buy rival TD Ameritrade for $26 billion
  • In February, investment bank Morgan Stanley bought online broker E-Trade for $13 billion
  • Last week, bankrupt car rental company Hertz announced plans to sell $1 billion worth of new shares
  • But those plans quickly ground to a halt when financial regulators began asking questions this week

✍️ Connecting The Dots

A new breed of investor has come to the fore during lockdown: the YOLO day-trader who, armed with a stimulus check and a “no-fee” brokerage platform, sets out to make a quick buck buying and selling stocks – often using leverage to amplify both gains and losses. Worryingly, many appear to be doing so on the unregulated “advice” of anonymous traders in forums or else internet personalities who, when asked, admit they don’t care a fig for the fortunes of followers who take their word as gospel.

Usually individual retail investors – even when they club together – don’t have much influence over, say, a company’s share price. Take $1.5 trillion Apple, for instance: even if everyone you knew got together and bought shares, it wouldn’t have nearly as large an effect as if Berkshire Hathaway casually added another $15 billion – or 1% – to its existing 6% stake. But when companies go bankrupt, it’s a different story. With a much smaller market value, retail investors can have a material effect on prices.

Of course, bankrupt companies’ shares are theoretically worthless, so their investors are effectively playing a game of chicken, hoping to profit from other investors buying in before reality bites. While some YOLO traders claim to have made significant sums, several have lost equally astronomical amounts – sometimes with tragic consequences.

Authorities may now be putting their foot down: this week, US financial regulators threw cold water over Hertz’s planned post-bankruptcy share sale, probably because any buyers would end up with shares worth nothing. The current head of the outfit has a reputation for looking out for oft-ignored smaller investors. And given professional financiers had already lambasted Hertz’s sale as nonsensical, it seemed likely only vulnerable retail investors were set to lose out.

🥡 Takeaways

It may make sense for most investors to focus their attention on exchange-traded funds (ETFs) invested in major stock markets – or, if you have a particular view on an industry, an ETF that tracks it. After all, ETFs let investors trace the trajectories of numerous companies without the concentrated downside risk of a single one. Individual stocks are among the riskiest investments out there, and should therefore comprise a small part of your portfolio if any at all. You can make big bets, sure – but take pains to get fully informed (and prepared) beforehand.

UBS – the world’s largest wealth manager – advised its well-padded clients this week to avoid chasing stocks that are all the rage among retail investors and instead stick to safer company shares. Although retail investors aren’t necessarily wrong, UBS recommends its clients focus on blue-chip growth stocks in retail and tech, as well as government bonds in case of rising volatility.

🎯 Also On Our Radar

Data out on Friday showed the UK’s national debt had grown larger than the size of the country’s economy for the first time since the 1960s. While unprecedented government spending in the face of coronavirus is naturally to blame, rising debt and a shrinking economy will likely make it more expensive for the UK to borrow money in future, thereby limiting the amount it can raise and spend on helping grow its economy.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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