How economic hibernation has turned us into failed Gordon Gekkos

Corporate regulator the Australian Securities and Investment Commission has warned lockdown punters playing the market that stocks and shares are no place for amateurs.

To borrow the words of their movie world hero, Gordon Gekko: “Greed is not good for some!”

Day trading may sound like a great way to pass the time and make lots of money while you’re waiting out coronavirus restrictions, but ASIC fears mums and dads will suffer big losses if the economy slides.

ASIC studied the weeks from February 24 to April 3.  It was a time when the ASX 200 tumbled from 7139 points to a low of 4546 points on March 23 before recovering to close at 5068.

The kind of rollercoaster seasoned investors dread. Yet new or unused accounts had increased 3.4 times.

In the benchmark period, retail brokers traded $1.6 billion.  In the period between February and April, that figure shot up to $3.3 billion. ASIC believes that was the intervention of bored stay-at-homes thinking they might turn a fortune.

But unfortunately, they didn’t.

In the week of March 16-22, the losses from retail trading amounted to $234m in a sample of CFDs or contracts for a difference.

ASIC said: “We found that some retail investors are engaging in short-term trading strategies unsuccessfully attempting to time price trends.”

ASIC added: “Even market professionals find it hard to ‘time’ the market in a turbulent environment, and the risk of significant losses is a regular challenge.

ASIC went on to point out that non-professionals or ‘mum and dad investors’ chasing a fast buck traditionally perform almost whatever the market conditions.

“The analysis suggested few pursuing quick windfalls were successful. During the focus period, on more than two thirds of the days on which retail investors were net buyers, their share prices declined the following day. On days where retail investors were net sellers, their share prices more likely increased the next day.”

In addition to the increased trading, there was a sharp increase in the number of new retail investors to the market — up by a factor of 3.4 times — as well as a marked increase in the number of reactivated dormant accounts.

The higher probability and impact of unpredictable news and events in offshore markets overnight only magnifies the danger, ASIC said.

“ASIC is therefore particularly concerned by the significant increase in retail investors’ trading in complex, often high-risk investment products. These include highly-geared exchange traded products, but also CFDs.

“Trading activity in CFDs has increased significantly during this period of heightened volatility. Leverage inherent in CFDs magnifies investment exposure and sensitivity to market volatility, so retail clients should be particularly cautious about investing in leveraged products at this time.”