Corporate regulator ASIC has warned mum and dad investors against playing the sharemarket after a wave of inexperienced day traders lost hundreds of millions of dollars trying to time the market.
The regulator cautioned that even trading professionals struggle to profit from the short-term trading strategies currently employed by thousands of new day traders.
The warnings come after the regulator’s surveillance team discovered a surge in retail investors joining the fray, spurred on by the creation of new accounts and the reactivation of once dormant ones.
In ASIC’s ‘focus period’ from February 24 to April 3, the regulator found an average of 4675 new ‘client identifiers’ – signifying new trading accounts appearing in the market each day.
In total, that equates to 140,241 new market participants within only 39 days.
Those figures show a huge acceleration compared with the previous six months (between August 22, 2019 and February 21 this year, referred to as ‘the benchmark period’), when the daily average for new identifiers sat at 1369.
At that rate, a 39-day period would result in only 34,502 new traders – 75 per cent less than was recorded in ASIC’s focus period.
The increase in traders brought with it an increase in money passing through retail brokers. Daily securities markets turnover grew from an average $1.6 billion per day during the benchmark period to a massive $3.3 billion during the focus period.
That huge increase has seen the amount of money passing daily through retail stock brokers almost double – up from $1.6 billion in the benchmark period to $3.3 billion more recently.
Worryingly, much of that money is being pumped into risky, short-term trades, with the average time between buying and selling a share falling to less than one day.
Know the risks
Greg Yanco, executive director of markets with ASIC, told The New Daily that investing can be a great way to build wealth.
But all investing comes with risks, and short-term trading brings a higher level of risk than long-term ‘buy-and-hold’ strategies, Mr Yanco said.
That’s only exacerbated by today’s high level of market volatility.
ASIC’s research found more often than not retail investors were backing the wrong horses, and losing plenty of money in the process.
“In times of volatility, even the most professional investors have trouble picking which way the market is going to head,” he said.
Unsurprisingly, inexperienced retail traders have done terribly over the past month.
“It’s a bit troubling to see them piling into markets and then when they’re net buyers, two-thirds of the time the market moves against them pretty quickly,” Mr Yanco said.
Retail investors have also rushed into the contracts for difference (CFD) market, despite the immense risk attached.
Because CFDs are leveraged investment products, traders stand to lose significantly more money than they invested in the first place if their market predictions are wrong.
Mr Yanco encouraged would-be investors to spend more time researching their investments, consider taking a longer-term approach, and seek out professional advice.
Investors should also be wary of offers that look “too good to be true” and make sure the person giving them investment advice isn’t the person selling the product they’re asking about.
Advisers warn against timing markets
Association of Financial Advisers (AFA) general manager of policy and professionalism Phil Anderson cautioned investors they’re not going to make money “over night”.
“A financial adviser would never encourage you to try day trading because the risk of losing your money is greater than making money,” he said.
“All the evidence suggests people don’t make money doing that.
That’s not to say investors don’t stand to make money by investing in the current market.
But rather than making wild guesses about stocks’ daily price movements, Mr Anderson said investors should take advantage of recent market falls to buy a bargain they can hold for a longer time period.
“It’s about time in the market, not timing the market,” he said.