Pain and Gain of Stock Trading Mania

Every few years, regulatory bodies and governments will attempt to “democratise” stock trading and investing. Unfortunately (or in some cases, fortunately), it has not made any mainstream traction until recently.

In some respects, regulatory bodies are partly to “blame” for the lack of innovation. This is not necessarily a bad thing. Regulatory bodies have a role in ensuring investors play by following the rules.  Financial institutions generally follow these rules to the dot.

The last few weeks, the stock market has seemed like a casino, indeed: You pay your money, you take your pick. And like a casino, more people go home unhappy than winners are laughing on their way to the proverbial bank.

Rise of the Armchair Investor

The retail trading boom took off last year. As armies of armchair investors download brokerage apps, stock prices have looked increasingly detached from economic reality. Those concerns have been underscored in recent days as trading enthusiasts on Reddit go to war with hedge funds. In the process, they are driving money-losing companies to dizzily high market valuations.

Its not just the US stock market that has seen this. Even in the Philippines, a firm with no revenue has become the most traded stock.

Abra Mining & Industrial Corp. has no revenue and zero analyst coverage. Yet, the loss-making mining company’s stock has more than doubled in 2021. It is also the most-traded name in the Philippines. The penny stock’s surge showcases the extremes to which the retail mania has reached in the Philippines. 

Gamification by Stock Trading Apps

Apps like Robinhood have made trading “easier”. It’s almost to the point of playing a game.

With its playful interface, online brokerage Robinhood Markets Inc. has brought a new class of U.S. traders into the market, raising concerns about the “gamification” of investing.

Its core offering — stock trading on a fun, game-like phone app — is controversial and has become widely imitated.

A product of the smartphone era, Robinhood offers a trading experience with social interaction seeped into its DNA. Investors are congratulated for their first trade with a confetti animation. They’re offered a (tiny) chance of snagging a share of a high-price glamour stock such as Apple Inc. if they get a friend to sign up.

A Chinese competitor, Webull, has become one of the fastest-growing retail trading platforms in the U.S. partly by following the Robinhood model of offering free stock trades with a slick online interface, while also offering the live customer-service hotline that some Robinhood users have asked for.

Emotions and Fundamentals; Oil and Water

Is this democratization that regulatory bodies and government are seeking? Unfortunately, gamification and democratization are worlds apart.

“Many retail investors are buying stocks on stories rather than fundamentals,” said Rachelle Cruz, an analyst at AP Securities Inc. “They don’t look at the numbers.”

“This kind of trading is not unprecedented,” James Angel, a professor and market structure expert at Georgetown University, said of the retail investing boom. “You look at market history and we’ve seen these periods of intense euphoria and speculation occur regularly. It seems like each generation needs to discover the stock market.”

We’d also like to add that each generation just has to learn its own lessons – both sweet and painful ones.  As they kids quip these days, “Yolo”!