Young retail traders increase risk tolerance and trade frequency: E*Trade
Online brokerage and banking firm E*Trade has published some interesting data and insights on how young traders – Millennial and Gen Z’ers – are dealing with the Covid-19 pandemic, at least from a financial and trading perspective.
Overall, E*Trade found that over half of young investors indicate they are trading more frequently since the outbreak.
The E*Trade survey certainly helps explain the phenomenal results and trading activity being reported by a number of the “new age” trading platforms such as Robinhood in the US, as well as FX and CFD brokers which serve a mainly European and Asian clientele such as Plus500, Admiral Markets, and Exness. These brokers are seeing record activity levels among existing clients, alongside record signup of new (mainly younger) clients during the Coronavirus pandemic.
The data come from E*Trade’s most recent wave of StreetWise, its quarterly tracking study of experienced investors. This wave of the survey was conducted from July 1 to July 9 of 2020 among an online US sample of 873 self-directed active investors who manage at least $10,000 in an online brokerage account. Results show trading trends among Gen Z and Millennial investors during the COVID-19 crisis:
Risk tolerance skyrockets since the pandemic… Over half (51%) of Gen Z and Millennial investors say their risk tolerance has increased since the coronavirus outbreak, 23 percentage points higher than the total population.
They are taking cash off the sidelines. Over one in three investors (34%) under the age of 34 said they are moving out of cash and into new positions, 15 percentage points higher than the total population.
…and they are trading more frequently. Over half of investors (51%) under the age of 34 said they are trading equities and 46% said they’re trading derivatives more frequently since the pandemic, compared to 30% and 22% of the total population, respectively.
They’re optimistic for a quick recovery. While only 9% of young investors said their investment portfolios have recovered since the beginning of the pandemic, 50% think it will happen in the next six months, compared to 33% of the total population.
Health concerns come first, but portfolio concerns are a close second. Personal health (58%) and investment portfolio (53%) concerns remain the top worries for young investors in the wake of the pandemic.
“When it comes to Millennials and Gen Z investors, time is on their side, but that doesn’t mean they can be complacent or act emotionally,” said Chris Larkin, Managing Director of Trading and Investment Product at E*TRADE Financial. “Access to the market has never been easier, so investors just embarking on trading should walk before they run. A thoughtful and disciplined approach is key—do your research, set up watch lists, and align your trading strategy with your goals and risk tolerance.”
E*Trade’s Larkin offered additional guidance to young investors getting started with trading:
Do your homework—don’t get caught up in stock fads. Like any purchase, impulse buying is never the way to go. Look at both the fundamental and technical indicators of a stock before diving in. Investors may use fundamental analysis to narrow down the choice of stocks and compare companies side by side, while technical analysis may come into play as they enter and exit positions and manage risk.
Learn the full spectrum of options trading. While young investors may gravitate to options to speculate on the future price of a stock in either direction, the reality is these derivatives are also used to leverage, hedge, and generate income. Leverage allows a trader to use less money to gain exposure to the movement of a stock’s price, while hedging is about reducing risk. Options can help protect trades—or an overall portfolio—in case things don’t work out quite as planned. Lastly, one of the biggest reasons investors trade options is to produce income—some options strategies let an investor collect money on existing or future stock positions. Of course, investors of all ages should understand that the existing stock may have to be sold for less than the current market price. Options trading is not appropriate for everyone and there are risks associated—as with any investment vehicle. Know your long-term goals and risk tolerance before getting started.
Test drive trading ideas. Many firms offer paper trading that allows traders across experience levels to test drive any investing idea—from simple equity trades to complex options strategies—without committing actual capital. Monitor a paper trading portfolio and easily modify to analyze new scenarios after executing a trade.
E*TRADE aims to enhance the financial independence of traders and investors through a powerful digital offering and professional guidance.
E*Trade said that the survey has a margin of error of ±3.20 percent at the 95 percent confidence level. It was fielded and administered by Dynata. The panel is broken into thirds of active (trade more than once a week), swing (trade less than once a week but more than once a month), and passive (trade less than once a month). The panel is 60% male and 40% female, with an even distribution across online brokerages, geographic regions, and age bands.