The number of retail, or non-professional, investors has grown exponentially in the U.S. throughout the pandemic. Large retail trading sites such as E*TRADE, TD Ameritrade, and Charles Schwab saw their number of new users increase by 103% compared to last year. At the same time, Robinhood had 3 million new accounts opened in the first quarter of 2020, almost double the first quarter of 2019. Half of Robinhood’s 3 million new accounts reported themselves as first-time investors. Teenage and young adult first-time investors with little to no knowledge are putting themselves at risk through retail investing.
The two primary reasons for this significant jump in retail investing numbers are the pandemic and the rise in investment-based social media accounts. A lack of live sports is one of the primary reasons for the significant increase in retail. Specifically, many of these new investors began investing during the pandemic to replace sports betting. Men aged 25-34 years old are the most likely demographic to bet on sports, and it is the same demographic that has flocked to Robinhood. The transition from betting to investing is very concerning as it suggests that there is now a large number of investors who treat investing like gambling. Since these people treat investment like gambling, they are less likely to invest based on fundamentals and research and are much more likely to invest in whatever stock they believe will make them money quickly. The average retail investor has underperformed the market by 11 percent, demonstrating how reckless the new retail investors’ strategy is.
The second factor behind the wave of new retail investors is the prevalence of investment-themed social media accounts and their content. Investment-based social media accounts are becoming more and more popular. As of August 2020, investing videos on TikTok had 2 billion global downloads. In general, the investing accounts on TikTok make it seem easy to make money quickly by investing. All of the posts are about significant gains, and there are almost no posts about losing money through investing. This type of biased posting gives their users the idea that the stock market is a place to make money quickly, which it is not.
In addition to their growing prevalence, investment-themed social media accounts’ influence is also growing. The most obvious example of this influence is the Reddit account wallstreetbets. Wallstreetbets is the Reddit account behind the recent surge in GameStop’s stock price. The number of people that wallstreetbets convinced to invest in GameStop and other seemingly overvalued (stock price is more than the company is worth) was record-breaking. During the height of GameStop’s surge, 24.4 billion shares were traded in a single day, setting the single-day trading record. Furthermore, the run-on GameStop orchestrated by wallstreetsbets caused investment firms to lose billions of dollars. One firm, Melvin Capital, lost over half of its total assets, over $6 billion, directly because of wallstreetbets.
Teenagers and young adults are especially at risk to start investing due to social media, as most users of social media sites such as TikTok are under 30 years old. Additionally, teenagers and young adults are more prone to addiction. This is concerning when considering that gambling is very addicting and the similarities between gambling and investing among the new wave of retail investors. Dr. Timothy Fong, the co-director of the UCLA Gambling Studies Program, stated that activities such as playing the financial markets and sports betting show cognitive, motivational, and personality parallels between gamblers and stock traders.
Some addiction experts also believe that it will be harder to treat investment addiction as people view big losses as part of the educational process of investing. Therefore, teenagers and young adults are more likely to start investing because of investment-based social media accounts. Once these teenagers and young adults start investing in reckless ways, trying to make large amounts of money quickly, they are more likely than other groups to become addicted to that feeling of making a significant gain.
Unfortunately, it is difficult to propose any effective policy solutions without first knowing the problem’s scope. Robinhood and similar retail investment sites have not published any information about the number of new investors who are teenagers or young adults. Without this information, it is impossible to determine the scope of the problem. Robinhood’s lack of transparency regarding this issue is especially concerning considering that Robinhood is currently being sued in Massachusetts for its aggressive marketing techniques designed to attract young inexperienced investors. Therefore, the SEC must require retail trading sites to publish detailed information about their users, broken down by age group.
This information for each group should include the types of trades, the number of trades make per week, and the amount of money lost or gained. This information will provide regulators at the SEC with a complete picture of how serious the problem of young inexperienced investors is, which will allow the SEC to propose policy solutions. The issue of young investors harming themselves through the stock market is one that I believe will grow exponentially in the near future. It is vital to act proactively now instead of reactively later.
Henry Mockridge is a student of the Public Policy and Law Program at Trinity College.