Share trading surges among millennials, but are they jumping in too quickly?

young woman using laptop to trade shares online

At a time when savings rates have slid to less-than-spectacular levels, the allure of taking higher risks for bigger returns has attracted a growing number of people to share trading

In fact, RMIT University’s senior lecturer of finance, Dr Angel Zhong found through her research that in Australia alone, the volume of retail trading by individual investors jumped more than 60% over the lockdown period, compared to pre-COVID. 

This is also supported by new data from Commonwealth Bank’s share trading platform CommSec, which shows the number of their customers with no trading experience more than doubled over the past year - from 8% before February to 18% in December. A majority of these new customers (83%) are under 44 years old, made up of millennial, Gen X and Gen Z consumers. 

But are young people jumping in for the right reasons and with enough preparation? Let’s take a look. 

Why share trading is on the rise

Zhong told Mozo that besides record low interest rates, a number of factors have driven this surge in retailer trading. Some young people saw it as a way to kill time while stuck at home. Others were spurred by “FOMO” (fear of missing out) to join the bandwagon after the global stock market crashed in March last year and share prices steeply fell.

Why share trading is on the rise

Diren, a 20-year-old university student from Sydney, was one such individual who decided to give share trading a go last year. With lots of spare time on his hands due to the pandemic, he invested $1,000 in September, with a goal of growing that pool of money to $10,000. 

“I was trying to think of ways to make money while at home. I looked into various things like dropshipping, affiliate marketing, day trading and investing. Buying shares seemed like the easiest option out of the things I was researching and I was constantly receiving ads for a trading platform called eToro so I decided to look into that,” he said. 

While Diren’s portfolio now sits at about $3,000, he said an initial barrier for him was the fear of losing money, as he had no prior or professional experience in trading. 

“There have definitely been points where I have lost money along the way. The first few weeks or even month of trading, I was in the negatives and most of my positions were losing money and it was very demoralising,” he said. 

“However I had heavily researched all the companies I invested in and believed in them and I just had to wait it out and eventually they all went green and had massive gains.” 

Patience and playing the long game is key, Diren said.

“Warren Buffet, one of the best traders in the world, said ‘The stock market is a device for transferring money from the impatient to the patient’, and I found that to be very true,” he said. 

“There have been a lot of times where I have seen a stock go down a lot and been very inclined to sell to cut my losses. However, when I was patient and held on through the dip, it almost always recovered and went up higher than before.

“I think it is very important to also be ready to lose some of your money and be comfortable with that.”

Share trading online: What are my options? 

The good news is it has become considerably easier these days for retail or non-professional investors like Diren to enter and participate in the share market. That’s because of the rise of online stock trading platforms like Superhero, eToro and SelfWealth. According to Dr Zhong, the big advantage of these platforms is that they tend to be low-cost. For instance SelfWealth (Classic), which won our 2020 Mozo Experts Choice Best Casual Trader Award, charges a brokerage fee of just $9.50 per trade.

The tradeoff of using these low-cost platforms though is that you may not necessarily have access to comprehensive stock research. But that said, some online options like CMC Markets and CommSec do offer live market data, analytics and detailed insights to customers on more premium accounts, although you can expect to pay extra for those features.

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What is social trading and why is it risky?

Social trading

The internet may have made share trading more accessible but Zhong said it’s also given rise to a phenomenon known as ‘social trading’. This is where retail investors exchange share trading ideas and give unmoderated investment advice on social media sites or discussion forums like Reddit and Hotcopper.

A prime example was the recent GameStop frenzy, where an army of amateur investors on Reddit banded together to purchase shares of the struggling US-based video game retailer GameStop and by doing so, drove up its prices meteorically. While some walked away with fortunes, others caught in the social media hype ended up losing money. 

“In Australia, in order to offer financial advice, people need to be licenced for it. [But on social media] anyone can make comments and give out advice,” Zhong said. “If you are just an average retail investor without any finance or investment background, it could be difficult to assess which comments are correct and which comments are biased.” 

‘Social trading’ is sometimes advertised on online trading platforms as ‘copy trading’ where the user can opt to copy someone else’s strategy. While this might seem like an easy way forward, Zhong said doing your own research is absolutely crucial. 

Share trading tips

So before making your first trade, what other tips should you keep top of mind? 

Here, Zhong offers a few:

  • Don’t put all your eggs in one basket: A good way to protect your portfolio is to avoid “dump[ing] all your money in one or two stocks,” said Zhong. It’s important to diversify - not just in the number of stocks, but also across the number of industries that those shares are in. For instance, buying ten shares from ten different banks won’t be considered diversification. 
  • Be realistic about winning: As anyone who frequents social media could probably tell you, most people prefer sharing the best or most successful parts of their life. That same concept applies to share trading, with Zhong saying that behavioural finance research shows people tend to just tell others about their wins and leave out their losses. This can then create the mindset that “it’s easy to make money because everyone is saying that they make money”, which can lead to unrealistic expectations and disappointment. Instead, be prepared for losses. 
  • Do extensive research: As tempting as it may be to go with the first trading strategy you see, Zhong said it’s important to research widely and take everything you read with a grain of salt. “A rookie in the stock market must understand that some trading strategies are the exact opposite of others - that’s because different analysts could have their own opinions,” she said. For instance, one expert might recommend ‘buying’ but another might interpret the same signal as a good opportunity to sell. So rather than looking at only one professional opinion, it may be wise to assess multiple recommendations.
  • Know who you’re investing in: Speaking of research, it’s also important to look thoroughly into a company and their industry before you actually buy. That might mean reading through their financial reports and future plans, as well as keeping on top of whom they’ve partnered with and if they’re releasing any new products. Some experienced investors may even spend months pondering about certain shares before making a move. Government website, Moneysmart recommends starting off with a sector you’re familiar with, as this could give you a better chance of identifying if a company is a strong or weak position.

For more tips, read our guide on how to start trading for absolute beginners