Hayden Schampers doesn’t invest in “boomer stocks”. That’s how the 23-year-old part-time trader describes blue chip ASX listed companies — the household banking, mining and industrial names that have dominated portfolios for generations but to him are as old and boring as the people who run them.
Despite his youth on-paper, the Brisbane-based project manager who works in the finance sector is part of a growing army of younger investors that have become a surprisingly significant force in global markets during the coronavirus pandemic.
These investors seek to make money on high risk “penny stocks”- little known biotechs, battery makers, technology groups and miners with share prices that are counted in cents rather than dollars. “I think younger traders find smaller stocks like penny’s more attractive due to the smaller bankroll required to generate significant gains,” Schampers says.
“That’s why some people see blue chips more as ‘boomer’ stocks because why would you get something like Rio Tinto when you could buy WZR (non-bank lender Wisr) or BET (Betmakers Technology) and generate maybe 100 per cent return in a year?”
Syd Durrell, 24, has been punting on shares for five years but ramped up his day trading in January.
“Unlike other traditional investments such as property, the amount of upfront capital required is considerably less. I believe being versed in current affairs is very important and as a result of this you’re able to see what impacts these have upon certain industries.” Though he notes he does like some speculative stocks.
With little to do during the pandemic-inspired lockdowns and a market swinging wildly, more and more young people are piling into the stockmarket, aiming to boost their bank accounts, but also for entertainment.
In the US, it has been described as the “Robinhood effect”, a reference to the investment platform offering commission-free trading that has surged in popularity during the COVID-19 pandemic. The Robinhood effect has in turn sparked a Robinhood rally, with sharemarkets posting eye-popping gains despite a bleak outlook for the global economy.
The surprising strength in sharemarkets (led by some extraordinary gains for some speculative stocks – such as bankrupt auto-rentals firm Hertz) has turned conventional wisdom about retail investors being “dumb money” upside down, and wrongfooted some of the world’s most respected investors. But nobody knows how long it will last, and market regulators are increasingly fearful it will all end in tears.
Why would you get something like Rio Tinto when you could buy WZR (non-bank lender Wisr) or BET (Betmakers Technology) and generate maybe 100 per cent return in a year?
Day trader Hayden Schampers
This Robinhood boom has been replicated in Australia. CommSec has recorded 400,000 new subscriptions over the year, according to an update this week from its parent Commonwealth Bank. Neo-bank Xinja has moved to capitalise on the euphoria, setting up its own stock trading platform Dabble to cater for demand in US shares. The corporate watchdog says that between February and April, turnover by retail brokers increased to $3.3 billion from $1.6 billion with many of these investments in more speculative stocks by younger investors.
Just this week, 18-year old Sydney man David Maxwell set up his first trading account and plans to soon wade into the market with a longer-term investment strategy based on exchange traded funds (ETFs) and blue chips.
“I also plan to invest a smaller proportion into riskier companies which may experience higher growth,” he says.
Schampers, Durrell and Maxwell are all members of Facebook groups where Gen Z and millennial members share tips and discuss trades often punctuated with emojis like rockets or spaceships —— to indicate a favoured stock.
While some of their investments are longer term, all three make plenty of short-term plays, often investing in a stock for a day or two to scoop up trading profits from share price moves.
But there are mounting concerns among regulators about the risks this boom is creating.
The Australian Securities and Investments Commission’s (ASIC) May report found an explosion in the use of contracts for difference (or CFDs in market-speak), a financial product allowing traders to magnify bets they make on certain trades. CFDs can allow for up to 500 to one leverage on an investment – but a losing bet can be disastrous. For example, at a leverage ratio of 500:1 a trader with a starting investment of $1000 could open a CFD position exposing them to $500,000 in losses.
‘This will not end well for most’
For the family of Alexander Kearns, a 20-year-old student from Illinois, the Robinhood rally has caused genuine tragedy.
Kearns was utilising options like CFDs at the time he took his own life in June this year when his account showed him in a huge cash deficit when it was only one side of the trade. The other side of the trade was yet to settle and would have capped his losses.
The young man’s suicide note made it clear his trading, and his belief he had accrued huge losses, was linked to his death. “How was a 20-year-old with no income able to get assigned almost a million dollars worth of leverage?”, Bill Brewster, a relative of Kearns and the family’s spokesman following his death, tells The Sydney Morning Herald and The Age.
Brewster says his cousin “killed himself over nothing” because the deficit shown on his account was only temporary and didn’t reflect his full trade. “I have called for Robinhood to figure out a better way to show this obligation to its users, especially given that the platform is rumoured to be growing among younger, and therefore less sophisticated, clients.”
But Brewster, who works in the finance sector himself, doesn’t think leveraged products such as options should be banned. “I believe in access. In my opinion, no one should be prevented from using a product because of a lack of money. However, options trading should not be marketed to the unsophisticated.”
He says Robinhood’s platform and financial incentives actively push people to riskier financial products such as options and margin accounts. “That will not end well for most users.”
According to ASIC, over a single week in March, retail client losses recorded by a sample of 12 local CFD providers were $234 million.
ASIC executive director markets, Greg Yanco, is particularly concerned about the use of leverage products by inexperienced traders. “The key thing is you amplify your gains and losses and you may find quite quickly that your initial investment erode away, in fact it can go into negative.
“And the investment itself comes at a cost. Even if you might be slightly winning on the investment, gearing costs can also eat into your capital really quickly.”
Yanco says a recent review by ASIC found that retail shareholders were driving incredible growth in non-blue chip stocks. The review found that between April 6 and June 12, the share prices of 255 ASX listed companies doubled. Another 70 share prices of ASX companies tripled over that period while the share price of 29 companies quadrupled.
“Retail trading is really pushing a lot of speculative stocks, with pretty extreme run-ups,” Yanco says.
“What we’re seeing at the moment is an increase in inexperienced day traders, rather than people making longer-term investments.”
But despite his warnings, Yanco – a former senior executive at ASX – appears warmed by the interest of young people in trading, refusing to criticise any trader for their youth, but rather warning for traders to be cautious if they are inexperienced, regardless of their age.
Yanco also welcomes innovative new trading platforms, but says the term Robinhood traders these days in his mind refers to day traders acting as a group to fuel share price moves.
“It’s really how people use these tools.
“They just need to be aware that they may be part of a community that’s participating in groupthink, (they say) ‘let’s go and buy X,Y and Z’ but they don’t know the fundamentals behind the stock.”
Xinja chief executive and founder Eric Wilson says Dabble is about providing access to markets for investors. Dabble will allow fractional trading but has limits on patterned day trading — where traders make large numbers of bets on asset price movements in a single session.
Once the pump is done guys those of you who are left are holding a very expensive investment.
Day trader on Facebook
“With the old school brokers, not only is it difficult to enter the market because of the cost of a unit share but also the cost of trading is very high,” he says.
ASX-listed investing app Raiz Invest has a different approach. Its platform allows users to round up all their purchases on credit cards and put the extra money into investing. Raiz boss George Lucas says the platform only allows that money to be invested in six different portfolio options, built through ETFs.
Despite having a more “old school” strategy of portfolio investing, Raiz has also seen a large increase in users. “We’ve seen huge growth in members, it’s up 15 per cent this year,” Lucas says.
For many youth investors buying shares is indeed something they dabble in, rather than a full-time job. Yet it does take a lot of attention. Early on Friday, a young trader asked on one of the day trading Facebook groups: “Looking forward to getting some direct insights from DW8’s [Digital Wine Ventures, 3 cents a share] CEO today on their live presentation.”
The response from another group member was swift and brutal. “Once the pump is done guys, those of you who are left are holding a very expensive investment which when you boil it down is a platform to try sell cellar door wine online.”
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Sarah Danckert is a business reporter.