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Day Trading Between Younger Investors

Stock trading can be defined as a middle-term (weeks) or short-term (minutes or seconds) horizon based on technical analysis of stock graphs and transaction statistics. Stock market investments may take between middle and long term (months or years) horizon and usually depend on fundamental analysis or what is commonly referred to as macro-and microeconomic analysis. Day trading refers to the act of purchasing and selling company stocks within a single day to make fast profits within minutes or hours (Charles, 2018). This practice is usually undertaken by a category of traders referred to as day traders. Day traders use mechanical to systematic day trading systems and can trade from one thousand to thousands daily.

There are different types of day traders, including breakout traders, reversal traders, and range traders. Breakout traders trade momentum and often concentrate on trading during the days with breakouts above the swing lows and swing lows (Charles, 2018). Reversal traders usually identify stock bottoming signs or topping out before placing a trade on the counter-direction (Charles, 2018). For instance, reversal traders utilise tools such as put-call ratio, TICKI, and volume to project a shift in trend. Range trader, look for stocks that have been trading within resistance and support levels and purchase them they hit support and sell them when they hit resistance level. Range traders are usually most successful in volatile stock markets. Irrespective of the one’s trading category in day trading, the most crucial aspect is having the discipline to adhere to a set of rules and following personal money management principles (Wijayanti et al., 2019). This essay focuses on day time trading, particularly among young investors and why they are focused on this trade.

Stock Market Investment Trends and Day Traders’ Behaviours

The 2011 stock market crash has demonstrated the dangers associated with the financial crisis. For instance, the US residents reported a substantial decline in self-reported well-being alongside increased depression symptoms following this stock market crash (Grall-Bronnec et al., 2017). Whereas trading is not categorised as a gambling activity, there is a likelihood of developing a trading pattern that is similar to gambling, especially when faced by unanticipated situations. Despite stock trading being a risky activity due to the financial losses involved, it has become a widespread practice among people across the world over the last two decades (Charles, 2018). For instance, a 2004 study conducted by the Federal Reserve Board’s Survey of Consumer Finances indicated that 49% of all US households had directly or indirectly invested in stock markets (Jadlow & Mowen, 2010). This represents a 9% increase compared to 1995.

Another survey conducted in France in 2013 showed that 26% of French investors held stocks from different trading companies (Grall-Bronnec et al., 2017). The study also revealed that investment decisions for the majority of stock traders were self-made, with only 33% seeking advice from their banks before investing. There have also been significant changes in investment techniques in the stock market over the last decade, which could partly be attributed to internet development. With the advancement of internet technology, anyone can easily open a stock trading account in any international stock market companies (Grall-Bronnec et al., 2017). The manner in which stock market investments are made is particularly attractive to educated young individuals who have highly attracted emerging forms of online games. Some authors view the stock market as one of the most socially acceptable forms of gambling alongside others like sports betting, bingo, and lottery. However, a recent study conducted on a sample of American students indicated that trading frequency among young people has substantially increased and it has in some incidences been excessive like gambling associated with games.

Day traders, who mostly comprise young people, are particularly at risk of excessive trading and hence likely to lose money. This is evident from a virtual investment simulation study conducted by Markiewicz and Weber (2013). The study comprised a population of 3,870, mostly men ageing 23 years on average. From a sample of 633 study participants, approximately 50% engaged in day trading activities at least once during the two weeks the survey lasted. Markiewicz and Weber (2013) concluded that gambling risk propensity predicted day trading, where day trading transactions increased with the investors’ gambling risk propensity. Therefore, day traders’ behaviours have the tendency to be influenced by a sensation or stimulation-seeking motive as opposed to an instrumental motive (Grall-Bronnec et al., 2017).

Without a doubt, day trading ought to be viewed as a strategic activity, as it requires a certain level of skills, including expert knowledge of the trading environment and its economic mechanisms. This allows the trader to make well-thought-out investments (Grall-Bronnec et al., 2017). Moreover, privileges such as high technological tools, low financing costs, reduced transaction costs, easy access to markets, and the knowledge of the market could significantly increase an investor’s probability of winning (Charles, 2018). These are privileges associated with institutional or professional stock traders (Grall-Bronnec et al., 2017). However, day traders use personal accounts and have limited technological and stock market knowledge. This exposes them to a higher risk of losing large sums of irrecoverable money.

Differences and Similarities between Day Traders and Gamblers

Several authors have discussed the differences between day traders and gamblers. For example, Grall-Bronnec et al. (2017) highlighted a distinct requirement associated with day trading, which is not met by gambling. According to the authors, gambling is mainly based on chance, while day trading is based on the analysis. Therefore, a gamble or bet can entirely be lost, and it can still result in an excessive return. Day trading may also be viewed as a continuous process while gambling constitutes an immediate or a series of events. Therefore, day trading is not similar to gambling.

Grall-Bronnec et al. (2017) also studied differences and similarities between personality traits of stock investors and gamblers. According to Grall-Bronnec et al. (2017), various factors, including numeracy proficiency, financial conservatism, superstition, competitiveness, and material needs, could be used to predict the tendency to engage in both activities. However, three personality traits, including present-time orientation, emotional instability, and impulsiveness, varied between gamblers and day traders. In particular, present-time orientation was positively correlated with gambling but negatively correlated with stock investment. With regard to emotional instability, it was negatively correlated with stock investment but positively correlated with gambling. Impulsiveness, on the other hand, was found to be related to gambling, but it had no significant relationship with stock market investment (Grall-Bronnec et al., 2017).

However, it is worth noting that the distinctions between stock traders and gamblers can be challenging, as sometimes, stock market traders behave like gamblers. For example, a systematic review conducted by Grall-Bronnec et al. (2017) revealed that some stock traders, particularly day traders, could be compared with pathological gamblers in terms of the degree of the loss control and clinical personality profiles. Similar to most pathological gamblers, day traders experienced several lesser early wins, chased their losses, lost control over the funds they invested, and displayed same mental distortions including gambler rationalisation or fallacy and selective memory (Grall-Bronnec et al., 2017). Nevertheless, day traders were better socially adapted compared to pathological gamblers, and they experienced less family and personal damage related to the trading activity (Jadlow & Mowen, 2010). Moreover, day traders were more cooperative and possessed higher education level than pathological gamblers (Grall-Bronnec et al., 2017). Day traders who exhibited behaviours like those of pathological gamblers were also driven by varying reasons with addictive tendencies being the most probable maladaptive behaviour.

Moreover, the structures of day trading and gambling tend to be somehow similar. For instance, both activities are practised on the internet. Furthermore, both day trading and gambling have a high event frequency and are characterised by short event duration (Grall-Bronnec et al., 2017). For example, the diversity of the financial stocks on the market and the multiple markets globally means that day trading can be done in a series of events similar to gambling (Grall-Bronnec et al., 2017). Also, stock markets have multiple daily opening and closing times based on global time variations like it is the case with gambling markets. This presents traders numerous with chances to purchase and sell stocks. More specifically, day traders use e-cash (a virtual money representation), making it possible for them to receive payouts within short time intervals. Furthermore, it is possible to reinvest the won amounts immediately, which could reinforce an addictive-like behaviour common with gambling.

Similar to gambling, financial losses in day trading motivates re-investing where the trader aims to chase the losses. Such behaviour could also encourage day traders to opt for stocks with high payout ratios, which are inevitably associated with increased losing risks. Moreover, day time traders may win several times their stake, and such wins give them the belief of possessing stock market trading skills, which contributes to the illusion of control (Grall-Bronnec et al., 2017). Despite making losses, this illusion of control could give stock traders an illusion of having chances of succeeding, which is closely associated with the notion of near-miss common among gamblers.

Motivations of Young Investors in Day Trading

There are different motivations of why there is an influx of younger investors in the stock market. First, Millennial and Generation Z (Gen Z) investors have a huge appetite to take risks, particularly during this period of Covid19 pandemic (Wijayanti et al., 2019). For example, the E*Trade Company 2020 quarterly survey indicated that 51%of young investors in the company have become more risk-tolerance since the onset of the pandemic (Merriman, 2020). Their risk tolerance level averaged at 23% points higher than all investor groups. Moreover, this category of traders gets of cash quickly, trade more, and are more optimistic than the older generations (Agarwal, 2020). The survey also found that approximately 34% of investors aged under 34 have moved out of cash into stock markets, making it 15% points compared to the rest of the investor population.

Second, there has been substantial growth in the innovation around trading commissions which has significantly driven market accessibility for everyone. Most specifically, these innovations have captured headlines and major online advertisement platform, where the majority of the younger investors are most active. Therefore, a combination of trading innovation and aggressive marketing of these trading platforms has significantly contributed to the increased number of younger investors in the stock markets.

Third, there has been a growth in stock trading applications such as Robinhood. For example, Robinhood registered a booming 3 million new accounts in the first quarter of 2020 (Welch, 2020). Such apps are freely accessible, with no barriers to entry and are compatible with smartphones. Therefore, younger investors can purchase whatever they want as fractional shares are available at prices affordable to them. The entry of new younger investors has been witnessed among firms young people love and know well about, particularly the technology firms (Dobre et al., 2020). Technology stocks such as Alphabet, Netflix, Amazon, Microsoft, Apple, and Facebook have been leading in terms of the new young market entrants in the last decade (Dobre et al., 2020). For example, by April 2020, Netflix and Amazon shares had increased to 25% and 24%, respectively (Hayes, 2020).

The availability of beaten-down stocks has also attracted new young investors in the market. The prices of stocks such as the Norwegian Cruise lines, Carnival Cruises, US Airlines, Delta Air Lines, and American Airlines significantly reduced in prices after the onset of Covid19, with some trading as low as $8 (Yan et al., 2020). The availability of low priced stocks presented opportunities for millennial clients to buy. Whereas investment in such stocks may offer short term margins, stock analysts view it as an unsustainable strategy in the long-term (Yan et al., 2020). This is because some of these stocks are highly volatile, and investing in them could be equated to almost gambling.

Conclusion

There has been an increase in the number of younger traders in the stock market. This could partly be attributed to the increase in the emergence of numerous investing platforms such as M1 Finance, Wellbull, and Robinhood, all of which have gained popularity among the Millennials. Moreover, younger investors try their hand in the stock markets because little is required to become a trader. In 2020 alone, millions of younger investors- the majority of whom are bored at home due to the Covid19 pandemic have begun trading options, ETFs, and stocks for the first time. The high numbers of younger investors have become such a huge force and have been credited with the moving markets. Although the entry of thousands of new younger investors into the stock market increases stock market democratisation, it presents some risks. More specifically, most of these young investors know little about the stock market and have ventured into this market as a form of gambling due to the reduced sporting events to bet on following the onset Covid19 pandemic. As a consequence, these young investors end up gambling money they would have allocated for their mortgages on questionable stocks which could lead to personal and family problems.

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