A New Breed Of Investor, Susannah Streeter, Senior Investment and Markets Analyst, Hargreaves Lansdown

Throughout history youth rebellions have come in many forms, from the riots across Europe in 1968 to the Arab Spring uprisings and the environmental protests that have erupted around the world. Armed with placards, chants and slogans, young people have massed in towns and cities attempting to change economic policies and entire regimes, with varying levels of success.

But increasingly, these protests have left the streets and moved online with hashtags replacing home-made banners, and global petitions gaining traction. Social media sites are today’s megaphones, amplifying voices globally and in January this activism hit the financial markets. In what appeared to be a digital remake of the 2011 Occupy Wall Street protests, a small band of investors took on the might of the hedge funds, using Reddit’s Wall Street Bets forum in particular to galvanise support.

It gained traction on a massive scale, with small investors piling into the shorted stock GameStop, ostensibly to teach hedge funds a lesson.  Some Reddit traders seem furious that these already wealthy institutions were trying to make more money by betting on the decline of a much loved video game chain.  Others believed that the company could recover from the shock of the Covid closures, and shift sales online.

As GameStop’s shares began a rapid ascent and word spread, more traders around the world piled in and the hedge funds, which had targeted the company, found themselves in the tight spot of a very short squeeze. It seemed to happen in the space of a few days, but the conditions for such a perfect storm had been brewing for many months if not years, as a new breed of investor began emerging on the stock market.

‘Free to trade’ platforms like RobinHood had become established, winning armies of new clients who were dipping their toes into the stock market for the first time. Rather than charging customers per trade or bundle of traders, one of the ways they make money is via order flow, by receiving payment for routing trades through the systems of electronic trading giants.

Hordes of cash had piled up during the pandemic with socialising and commuting costs slashed. As workplaces were forced to close, many more people had time on their hands and browsed chat rooms and social media sites looking for investment tips. At the same time, new investors were observing the huge gains on the financial markets, which appeared to be disconnected from the real economy, where millions of people were losing their jobs. It was in this climate that swirling emotions, mixed with the money sloshing around, and easy access to rapid trades, that the GameStop share trading frenzy took off.

But it’s been evident in other speculative trading behaviour as well. Younger investors have bought into cryptocurrencies, prompting warnings from the UK’s watchdog, the Financial Conduction Authority that they could risk losing all their money by making risky investment decisions.

In many ways trading apps have democratised the whole process and opened up what was seen as an industry closed off to ordinary folk.  Younger people in particular have already become used to running their life through apps. From fitness and health through to holiday bookings and bank accounts, the phone in the pocket has become our personal digital assistant. Many people already manage money on an app, so managing a trade is seen as the natural next step. Many of the new trading apps have been designed based on the interactions people already have on social media, with news feeds, alerts, and chat rooms, with notifications coming through which demand attention. Some apps even congratulate users for making trades with celebratory animation. 

Although it is encouraging to see younger investors enter the markets and gain some valuable experience, there are increasing concerns that the collision between social media influencers and the ease of use is leading investors to take short term speculative decisions, rather than linking investment goals to a long term financial plan. If you are trading on the go, you need to be sure you’re giving each trade as much consideration as you would if you were sitting in a quiet place at home, so that you are not swept up in any hype and you take the time to fully analyse the fundamentals of any trade.

The rest of this editorial will be published in print at a later time.