Gamblers, day traders and smart investors

As gamblers and day traders flock to the ASX, smart investors are increasingly turning to structured products for greater clarity of risk and reward.

The ongoing volatility in sharemarkets has attracted plenty of first-time investors and wannabe day traders looking to cash in on wild swings in equity valuations.

Significant uptick in first-time investors

One of the biggest stories to come out of the COVID-19 crisis has been the significant uptick in first-time investors. This was highlighted in a report by ASIC in early May. The regulator conducted securities market analysis in Australia using a focus period from 24 February 2020 (the first trading day after the market peak) to 3 April 2020. The benchmark period used for comparison is the six months prior (22 August 2019 to 21 February 2020).

ASIC’s analysis found that the average daily securities market turnover by retail brokers increased from $1.6 billion in the benchmark period to $3.3 billion in the focus period. Even more compelling was the evidence of trading by new or dormant accounts, which ASIC calls “new identifiers”. An average of 4,675 new identifiers appeared per day in the focus period. To put that into perspective, during the benchmark period, ASIC observed 1,369 new identifiers per day.

The rate of creation of new trading accounts during the first few months of the COVID-19 crisis was 3.4 times higher than usual. ASIC also found that trading frequency spiked during the period. The COVID-19 pandemic has effectively created a new breed of unsophisticated day traders eager to buy and sell the intra-day price fluctuations of listed securities.

Losing streak  

“The average retail investor was not proficient at predicting short-term market movements over the focus period,¹” the ASIC report noted.

“For more than two-thirds of the days on which retail investors were net buyers, their share prices declined over the next day. For more than half of the days on which retail investors were net sellers, their share prices increased over the next day. If all retail investors held their positions for only one day, total losses would have amounted to over $230 million". ¹

Short-term trading might be a fun way to gamble, but it is by no means a prudent form of investing. Poor market timing can be catastrophic. Particularly in volatile markets.

Day traders and gamblers play an extremely risky game. For investors, there are much smarter options to make volatile markets work in your favour.

Clarity of risk and return

Risk and return are the fundamentals of investing in any asset class. The more clarity an investor has on their risk and return, the better equipped they are to make informed investment decisions.

Throwing wild bets at the market may work when share prices are rallying. But as we have seen in recent weeks, markets remain incredibly volatile and linked to an ever-changing news cycle.

The economic impact of COVID-19 remains unknown. Infection rates have started to rise again in Victoria, and we have already seen tighter lockdown measures imposed as a result. Smart investors demand more certainty than ever and are looking for ways to navigate this volatility.

Structured products provide greater certainty of risk and return.  One of the products issued by a major global investment bank currently offered on the Stropro platform yields a 6.5% per cent fixed coupon, paid quarterly. The product is linked to a basket of blue-chip bank shares that have strong revenues, market share, balance sheet and the ability to withstand further shocks to the economy. Investor’s capital is at risk if the shares fall by 40 per cent from current levels and this is only measured at maturity.²

Unlike direct equities, passive ETFs and hybrids, structured products can be purpose-built around investment themes and may offer a level of downside protection.

As volatility persists, gamblers and day traders will continue to blindly play the stock market in the hope of winning big. Smart investors utilise structured products to achieve greater clarity of risk and return.

 Anto Joseph is the CEO of Stropro.

1. ASIC, Retail investor trading during COVID-19 volatility, May 2020, read here
2. Subject to credit risk of the issuer

This article has been prepared by Anto Joseph, CEO of Stropro Operations Pty Ltd (ABN 28 633 603 399) (Stropro). This article is for educational purposes and is not a substitute for professional and tailored financial advice. This article expresses the views of the author(s) at a point in time, which may change in the future with no obligation on Stropro or the author to publicly update these views. This article uses information from sources the author considers to be reliable but does not represent that such information is accurate or complete, or that it should be relied upon. Past performance is not a reliable indicator of future performance. Investments may rise and fall in value and returns cannot be guaranteed. Stropro makes no representations or warranties, express or implied, are made as to the accuracy or completeness of the information it provides. Stropro is a Corporate Authorised Representative (CAR No. 1277236) of Lanterne Fund Services Pty Ltd (AFSL No. 238198).