Much has been made of the impact of so-called ‘Robinhood traders’ on share market performance during and after the coronavirus-induced March crash.
Robinhood, although not yet available in Australia, is the pioneer of brokerage-free share trading in the United States. A popular brokering firm, it is well-loved by millennials in particular. It boasts a slick user interface and easy access to shares, options and cryptocurrencies.
In June, I penned an article discussing how signs of dangerous millennial share trading behaviour were growing.
Today, a report in the Australian Financial Review (AFR) tells us that the corporate regulator is increasingly concerned as well.
The AFR reports that the Australian Securities and Investment Commission (ASIC) has “social media accounts in its sights” over concerns they are fuelling high-risk investing behaviour.
ASIC has noticed a significant uptick in groups on social media platforms like Facebook, Reddit and Twitter targeting inexperienced retail investors by using exaggerated claims of rapid and enriching share market gains.
Penny stocks prove popular with millennials
The AFR quotes ASIC as stating: “Social influencers and social trading are contributing to herd momentum in speculative stocks. There are a lot of scams and misinformation about products and trading strategies.”
This sentiment isn’t helped by an ASIC analysis of trades between February and June. It found that ‘new’ account holders were allocating 69% of their holdings to S&P/ASX 200 Index (ASX: XJO) shares, with another 10% going to exchange-traded funds (ETFs) and 21% to ‘other’.
In contrast, the accounts of more experienced investors showed an average allocation of 86% to ASX 200 shares, 3% to ETFs and 11% to ‘other’.
It’s this ‘other’ that has ASIC worried for the former group. It indicates that newer investors are increasingly playing the smaller end of the share trading market outside the ASX 200. These shares are often called ‘penny stocks’ and are usually classed as ‘high-risk investments’.
ASIC also noted that:
“From April 6 to June 12, there were 255 ASX-listed companies where share prices doubled, 70 companies that tripled and 29 that quadrupled. Retail investors accounted for 80% of trades of these stocks, despite comprising just 16% of broader market activity.”
Of these 255 ASX shares, ASIC also noted 80% had negative earnings in FY2019. The remaining 20% had relatively high price-to-earnings (P/E) ratios (averaging around 55).
Foolish takeaway
The conclusion? ASIC is worried, and seems to be looking at ways to curtail these kinds of activities from ‘Robinhood traders’. Whether this comes in the form of new regulations and rules, we will have to wait and see. But I would consider the spruikers of these sorts of share trading tactics to be on watch.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Sebastian Bowen owns shares of Facebook. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Facebook. The Motley Fool Australia has recommended Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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