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Retail investors at risk in volatile markets

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ASIC analysis of markets during the COVID-19 period has revealed a substantial increase in retail activity across the securities market, as well as greater exposure to risk. We found that some retail investors are engaging in short term trading strategies unsuccessfully attempting to time price trends.

Trading frequency has increased rapidly, as has the number of different securities traded per day, and the duration for holding the securities has significantly decreased: indicating a concerning increase in short-term and ‘day-trading’ activity. 

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

For retail investors to attempt the same is particularly dangerous, and likely to lead to heavy losses – losses that could not happen at a worse time for many families.

Retail investors chasing quick profits by playing the market over the short term have traditionally performed poorly – in good times and bad – even in relatively stable, less volatile 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 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 Contracts For Difference (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. In the week of 16-22 March 2020, for example, retail clients’ net losses from trading CFDs were $234 million for a sample of 12 CFD providers.

Download the paper (PDF 494 KB)

Regulator Information

Abbreviation: ASIC
Jurisdiction: Australia

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