People want to invest more these days
Covid has been a boon to online trading around the world. According to a Bloomberg Intelligence research, online retail traders account for more than 20% of all US stock order volume. This is because stay-at-home workers are looking for ways to supplement their incomes.
The pandemic, meme stocks, cryptocurrencies, and geopolitical tensions have all played a part in more people wanting to learn and participate in trading financial markets, says Chad Smith, Director of Research and Analysis at forexbrokerlisting.com. “A lot more traders signed up because potential trading and investment opportunities to support incomes are now more visible than ever.”
GameStop, The AMC saga demonstrates the power of retail traders
Our retail equity-volume target has increased three percentage points to 23% from the previous market. This confirms the influence of day traders, as institutions relax. However, the 55% increase in U.S. volume for 2020 compared to 2019 was fueled by COVID-19-induced volatility and no-fee trades among many catalysts. These could slow down as 2021 progresses.
Based on our calculations, the recent volume surge led GameStop Entertainment and AMC Entertainment to have boosted retail investor participation up to 23% of U.S. Equity trading from 20% in 2020. The massive increase in retail trading of “meme” stocks made popular through social media is reflected in over-the-counter (OTC) volume, benefiting the four largest wholesalers (Citadel Securities, Virtu Financial, G1 Execution/Susquehanna, and Two Sigma Securities) and order-flow payments.
Although interest in meme stocks is likely to dwindle and decrease our retail-share forecast for the year, the GameStop/AMC frenzy confirms that retail accounts for an ever-increasing share of U.S equity-share volume.
Volatility caused by the virus drives volume more than value trades
U.S. equity share volume increased 55% year-over-year in 2020, but value traded only increased 49%. This is due to a retail preference toward lower-priced stocks than traditional institutions can often touch. Although the six percentage points gaps might seem small, they show the increasing influence of retail investors. Covid-19 disruptions forced many to reallocate their positions, created a new generation of day traders, and increased the activity of more experienced traders.
The brokerage landscape is reshaped by the Pandemic retail trading boom
CFD and Forex Brokers are also making moves to ensure they have the best chance of gaining a competitive edge and the largest share of the market.
Over the past year, a swarm of mom-and-pop investors has flooded the financial markets. Retail investors have been buying everything, from Bitcoin to call options to meme stocks, thanks to low-interest rates and thousands of dollars in stimulus funds. Bloomberg Intelligence data shows that 20% of U.S. equity trades in 2020 could be traced back to retail investors. This number was 22% in the second quarter of 2021.
Both legacy and upstart platforms have experienced a surge in activity, some executives claiming it is the beginning of a new era of retail trading. However, the COVID-19 pandemic is slowly receding and other Wall Street executives are beginning to question whether this boom is a new normal for retail investors or a temporary fad. If so, will M&A be able to thin out the new class now at the forefront of the brokerage world? If you go back just two years, the retail brokerage business was very different from what it is today.
Charles Schwab Corp. was still distinct from TD Ameritrade Holding Corp. Robinhood Markets Inc. was just a fledgling company and its valuation was only a fraction of the one it will reach when it goes public later in the year. E*TRADE Financial LLC had just six months to go before its board announced plans to continue as an independent company with no Morgan Stanley tie-up. The average price to trade a U.S. Stock online via Schwab, TD Ameritrade, or E*TRADE was $6.
In late 2019, the industry decided to follow Robinhood’s free trading model. This was after years of fighting pricing pressures. It triggered a wave deal as the scale of the market became more important than ever.
Interactive Brokers, one of few publicly traded retail brokerages that were founded before 2008’s financial crisis, saw average daily trades increase 53% from February 2020 to March. It’s not the only one. Schwab added 1.2 million brokerage accounts in February to its portfolio, more than 93% more than the 626 000 new accounts it created in December 2020. Both companies’ stocks are trading at near-record highs.
Although incumbents have seen significant growth, the most important beneficiaries of the rush to the market have been younger platforms that allow investors to sell and buy assets using their smartphones.
Retail investors are more likely to trade stocks at lower prices because they believe there is a greater upside and can accumulate larger positions. Brokers allow clients to sign up quickly and test different trading strategies with a demo account before they commit real money. Clients have the ability to trade any type of derivative, also known as contracts-for-different (CFDs), that gives them the benefit of the underlying price movement of a financial asset without having to take on the risks and hustle. You can benefit from any price movement in Tesla’s underlying stock by buying a CFD.
What is CFD Trading?
CFD stands for Contract for Difference. It is simply a contract for the difference in the price of an underlying asset, whether that is a stock or currency. You are buying price movements in an underlying asset such as shares, indices, or commodities. The underlying asset is not yours. You only get the benefit from the price movement in the asset. CFD stands for Contract for Difference. This is because the CFD allows you to trade the difference in price between the time the contract is opened and the time it closes.
What are the advantages of CFD trading?
Trading in CFDs can have has its advantages:
- The first and most important benefit. With just a few hundred dollars, you can open an account and begin trading.
- You can also choose to be long or short. This is the second benefit. You can also short the stock if you believe Tesla will drop in price and make a profit. You can also go long if you believe it will increase in price. The same can be done with thousands of other instruments such as stocks and forex pairs, indices, or cryptos.
- The third benefit is the possibility to leverage your position. You can buy large exposures with very little capital, otherwise known as trading on margin. This is a double-edged sword. While it is great when the market is moving in your favor, your profits will be amplified. However, your losses can also be amplified if the market is against you. High leverage brokerages offer clients up to 1:1000. This means that you can multiply your capital by up to x1000. However, most traders in the European zone cannot make more than 1:30. There are two types of margins when trading CFDs. If your trade is close to causing losses, a deposit margin will be required. A maintenance margin will also be required. You may receive a margin call asking you to replenish your account funds if this happens. You may lose any money if you fail to add enough funds.
- CFD trading also allows you to hedge your stock portfolio. For example, if you believe that the stock market needs a correction, but don’t want to sell due to the tax and costs involved, then you can short these stocks or an index to limit any potential downside losses.
What are the different financial instruments you can trade?
The best brokers offer more than 15,000 instruments including options, currencies, commodities, shares, indices, and forex. You don’t need to have access to multiple platforms in order to trade different markets when you use a top broker. You can access everything from one login. Many traders prefer to work with multiple brokers because they offer a variety of benefits including personalized support and trading tools.
Is CFD trading like spread betting?
There are important differences between the two. CFDs, unlike spread betting, are designed to closely mimic trading in the underlying market. For example, a Tesla shares CFD is equivalent to buying one share of Tesla. If you wanted to purchase the equivalent of 2,000 Tesla Shares, you would buy 2,000 Tesla share CFDs.
A forex CFD can be bought or sold by buying or selling an equivalent amount of base currency and selling the equivalent amount in the quote currency. A single CFD purchased on EURUSD will give you the same exposure to USD as purchasing 100,000. CFDs are easier to understand if you have experience in non-leveraged trading.