Analysis: financial literacy or luck? The year small traders had a big impact

LONDON / NEW YORK, December 28 (Reuters) – In May, San Diego-based Emily was feeling well after a year of double-digit gains from stock trading. Stock options, which some other homemaker investors were venturing into, would boost her returns, she decided.

Emily was part of the army of small investors who rocked the stock markets in 2021. Some have made fortunes by eliminating hedge funds from short positions in so-called “meme” stocks such as retailer GameStop and the AMC Entertainment cinema.

But AMC turned out to be Emily’s downfall. As her shares hovered around $ 15, she began to sell “naked calls” that allowed holders to buy underlying shares from her at a pre-agreed price. Instead of falling as expected, however, AMC stock has skyrocketed.

Bare options meant that Emily didn’t actually own the shares. When AMC shares hit $ 72.62 on June 2, margin calls were made – essentially a request for money to top up her brokerage account.

“I was on the phone with (brokerage) the TD Ameritrade margin team, telling them to give me more time… but it was either I was selling it or they were selling it,” she said. Eventually, she said she liquidated her portfolio, losing $ 670,000.

Emily is not the trader’s real name but she has provided documents confirming her identity. Reuters could not independently verify the extent of its losses, but looked at brokerage statements showing that it sold large call options on AMC and other stocks in May.

“It was very devastating. I couldn’t sleep,” Emily said. After quitting her job in human resources at the end of 2019 for a full-time exchange, she now works as a delivery driver.

Her story is a warning about what can happen when booming markets make inexperienced investors risk everything.

But for every Emily, there is a tiny trader who rode this year’s stock market boom, fueled by the economic recovery, central bank printing of money, and government cash donations.

TD Ameritrade, the broker Emily used, says that with broker Schwab he added six million new accounts this year.

The conditions were right for retail even before the pandemic, as new mobile platforms allowed individuals to buy stocks, or fractions of shares, with little or no commissions.

“Everyone can have their piece of the pie,” said Ben Phillips, a 30-year-old pilot from London who started trading in 2019. He defines himself as a long-term investor, but also trades daily “like a bit fun, a little play “.

The retail surge was the “main reason” for global demand for equities which reached $ 1.1 trillion this year, JPMorgan strategist Nikolaos Panigirtzoglou said.

“By acting as dynamic traders, retail investors will most likely continue to propagate the stock markets, at least for the year to come. They will have no alternatives as interest rates will stay close to 0%. “, he added.

MAJOR BUYERS

Retail, unlike the meme craze, seems unlikely to fade away.

U.S. retail traders have bought $ 281 billion net of U.S. stocks so far this year, up from $ 240 billion in 2020 and $ 38 billion in 2019, according to Vanda.

Many have branched out into stock options, increasing U.S. volumes by more than 40% from 2020, according to estimates by analyst firm Trade Alert.

They also account for up to half of individual stock option trades – bets on individual stocks – according to JPMorgan. This in turn took the share of these options in total option volumes to an all-time high this year, according to Reuters analysis of Trade Alert data.

The retail frenzy is most pronounced in US markets, and even popular platforms in Europe indicate that traffic is generally highest at US companies such as Tesla, Nio, Apple, Amazon, and GameStop.

But the trend is widening.

Russia’s Moscow Stock Exchange says 26 million retail accounts are registered there, four times more than at the start of 2020, and the exchange and brokerage firm Tinkoff plan to extend trading hours, including the weekend.

In India, 19% of trading in November was done by mobile phone – a barometer of retail activity – according to data from the Bombay Stock Exchange, up from 7% in November 2019.

TO SLOW DOWN

Growth in business activity has slowed, perhaps because central banks are signaling the arrival of an interest rate hike.

The online brokerage platform eToro, which has two-thirds of its clients in Europe, recorded 106 million transactions in the third quarter of 2021, half of the total for the first quarter, although well above the 63 levels. million at the start of 2019.

Lean returns elsewhere persuaded Phillips, the pilot, to start trading in late 2019.

While his holdings in Tesla were hit hard by the March 2020 sale, he bought more after watching YouTube videos where traders were advising observers to “buy down”.

The ensuing rebound quadrupled Phillips’ initial 15,000-pound ($ 20,100) expense, he said, but he has no plans to sell, citing his “10-year sentence” against You’re here.

Others, like Dan, a 24 year old college student from the north of England, caught the trading bug through “boredom” and reading online discussion forums such as “WallStreetBets” which pumped stocks. memes.

Asking that his full name not be used, Dan says he made his £ 1,000 investment four times in GameStop, although friends who entered late lost money.

He has since quit day trading, calling it “luck”, but invests in stocks through a UK savings account. The experience “helped me be more financially competent,” he added.

Emily, the Californian trader, also still trades but in smaller volumes.

She hopes one day to replenish her wallet.

($ 1 = 0.7454 pounds)

Additional reporting by Andrey Ostroukh in Moscow Editing by Sujata Rao and Mark Potter

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