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2020 has changed our lives in dramatic ways. Thanks to COVID-19, many of us now work from home. Rather than go to the doctor’s office, some have embraced telehealth apps. And instead of seeing brokers in the flesh, many have opted to sign up for online brokerages.
Before COVID forced us into quarantine, we were hesitant to do their investing online. But, with in-person meetings no longer possible, we’ve finally seen how convenient it is. This trend has been a boon for online stock brokerages. Questtrade added 50,000 new accounts in Q1 2020. Robinhood, a popular American trading app, saw three million new members join in the first four months of 2020.
Is online trading here to stay? Is it in the best interest of investors to engage with these services without first consulting a professional? We’ll examine these issues in today’s article.
Business Has Been Booming For Online Brokerages
As lockdowns forced millions of Americans into their homes, boredom quickly set in. Sports leagues around the world had suspended play, so that was out. While some theatre chains streamed movies online, new releases were few and far between. And land-based casinos were locked up tight.
At first, we watched every show in our Netflix queue. We even stumbled across the spectacle that was “Tiger King.” And then, in April, a little gift landed in the bank account of hundreds of millions of Americans.
It was the federal Coronavirus benefit. Approved by Congress in March 2020, the IRS began to send checks worth as much as $1,200 to eligible Americans. As of June 2020, the government has sent more than 159 million checks.
For some, this massive injection of capital went straight to rent, bills, and other necessities. But, for those lucky enough to have a stable income, this windfall became seed money for the stock market. At first glance, putting capital into the S&P or the Dow Jones during the COVID crash seemed suicidal.
But, as losses slowed, the media played up the massive correction as the best buying opportunity since the Great Recession. Treasury Secretary Steve Mnuchin concurred, saying the Coronavirus selloff would be short-lived.
And so, millions of Americans, many of whom had nothing but time, plunged their $1,200 extra dollars into the stock market. With in-person brokerages shuttered, people flocked en masse to services like Questtrade and Robinhood.
Robinhood: A Major Factor In The COVID Crash Recovery?
As we already mentioned, more than three million new investors have signed up with Robinhood since the pandemic started. This app, which got its start back in 2013, has long had a cult following among Millennials for making investing cheaper and more straightforward.
Then, the COVID crisis introduced millions more to this stock trading app. At first, Robinhood creaked and groaned under the strain. In early March, when COVID-related market swings began, the app crashed several times.
As the company adjusted to the new loads, though, their user base surged. By the end of March, they had ten million users. Then, as stocks sat 40% off their all-time highs, these new app users began scooping up the “bargains.”
To be sure, some stocks got oversold during panic selling in March. However, given the new realities of our COVID-infected world, these novice investors made some “curious” picks. Consider the case of Delta Air Lines (DAL). Of all industries affected by COVID, the virus has hammered travel the worst.
Now, few Robinhood users held DAL before March 2020. Yet, after Delta’s stock lost more than half its value, Robinhooders bought up hundreds of thousands of shares. DAL has since rallied 50% to around $30/share since hitting its 52-week low. Even though, for the foreseeable future, international travel won’t be a thing.
We see a similar trend emerging with publicly-traded travel/travel-adjacent companies like Boeing, Hertz, and MGM. Despite the bleak future these companies face, Robinhood investors are piling in. Perhaps they think things will go back to normal soon, pushing prices 2-3x higher, thereby making them piles of cash.
But, if any of these companies go bankrupt, they’ll be in for a rude awakening.
Will Interest In Online Trading Endure Post-COVID?
Currently, new Robinhooders and other novice investors have heavily chummed the market’s waters. In a way, they are like children who have yet to learn that stove elements are hot. In other words, they’ll have to get burned badly to learn their lesson.
In particular, most don’t realize that bankruptcy proceedings seldom favor retail investors. On the other side, these shareholders get next-to-nothing – if anything at all. As of June 2020, this reckoning hasn’t happened yet. Stocks are currently trading around 10% below their post-COVID high, but well above 52-week lows.
When the next big plunge does happen, though, loads of over-leveraged Robinhooders/newbies will get flushed. If anything, we’re deeply concerned – according to a recent Yahoo Finance report, 20-year-old Alexander Kearns got cleaned out on a bad trade he made earlier this month.
His account briefly showed him $700,000 in the red, which later reset to zero. It appears he thought he owed that amount, so he committed suicide shortly thereafter.
While not everyone will react as severely to busting their account, the coming crash will greatly reduce investment post-COVID. The current class of inexperienced investors do little (if any) research. They treat markets like a poker game. As any experienced card player knows, the money always flows to the sharks in the long run.
In our view, a small percentage of these new investors will stick around. They are the ones doing extensive research, making smart bets, and learning from their mistakes. The rest will slink away after torching thousands of dollars in life savings.
Prepare For Stormy Seas
If you are new to equities investing, batten down the hatches. The current market frenzy won’t last forever, as it is pumping cash into stocks with poor long-term prospects. When it all comes crashing down, many of the neophyte investors posting on /r/wallstreetbets will mysteriously vanish.
Don’t be a statistic. Do your homework, stay within your bankroll, and keep learning. Invest wisely – 2020 still has plenty of tricks up its sleeve!
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