James Bianco explains the dramatically changing investing preferences of the public, writing:
There is no one definitive measure to show this shift, but the signs are unmistakable. Trading in individual stock options has been booming to new records, according to data from the Options Clearing Corporation. This has been led by purchases of options to buy stocks in lots of 10 contracts or fewer. Nearly 15 per cent of all trades are for one contract.
Penny stocks have recently caught the fancy of investors. In December 2020, they traded 1tn shares, according to data firm SentimenTrader. That easily exceeded the previous monthly record.
Such trading does not happen if the public’s money is caught in a battle between a professional money manager in Boston or a passively managed ETF. Neither of these two groups traffic in these areas.
Instead, three things have dramatically changed the public’s investor preferences. First was the cutting of brokerage commissions to zero in 2019. Then, widespread adoption of fractional purchases added further fuel to the fire. Finally, the massive increase in savings from government assistance payments led to increased trading. This started with the Cares Act last March and continued through the $900bn stimulus package passed last month. The Biden administration is promising more of the same.
Armed with new money in their bank account and a fear about the economy that kept them from spending, this retail crowd turned to trading. Their investing is not focused on the proverbial “safe” names that would be found in the S&P 500 index. If it were, they would continue to buy passive ETFs and call it a day. Instead, they are looking for the next “unicorn”.
A Silicon Valley investor once asked, “What do you call a person who bought 10 speculative tech stocks, nine of which went to zero and the tenth that was a unicorn?” The answer is, “fabulously wealthy.”
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