Financial Fiasco?

Posted: March 16, 2021

Pandemic, amateur investors impact market

For young people looking to enter the workforce, the state of the economy is a significant factor in determining how easy finding a job will be.

Brought on by the pandemic, safety guidelines have forced businesses to close and shattered demand for others. Fewer people are traveling, so airlines have fewer customers to fly. Fewer people are driving to work, so gas and oil companies have less demand for their fuel. COVID-19 has crippled many other sectors as well.

Yet, US stock market indices and measurements hit record high after record high, all in the midst of the pandemic. While much of this was powered by tech companies profiting from people stuck at home, it was certainly unusual given the state of the economy.

Another abnormal shift is how volatile stocks have been. Market volatility, or how much stock prices vary over time, has risen to rare levels since the pandemic began. Besides the obvious factor of lockdowns affecting companies and their stock prices, many blame the rise of amateur retail traders, empowered by apps like Robinhood, “pumping and dumping” stocks.

Bored during COVID lockdowns, people with little experience have started investing via apps like Robinhood, which have no trading fees. However, they’ve also been investing with much more risk without the experience to manage it. Due to the lack of requirements necessary for using these brokers, these amateur investors have caused abnormal market movement with their often-abnormal trading.

“Before you drive a car, you take driver’s ed,” said Jay Lessard, a Minnehaha parent and vice president of equity trading at Royal Bank of Canada. “In the same way, if you don’t take time to learn before investing, you could do some real damage to yourself.”

Driven more by hype than any fundamental reason, stock prices have increased exponentially in mere hours for seemingly no reason. The culprits behind the price increase are often those stuck at home, using stimulus-check dollars to buy shares of companies trending on discord chats and subreddits.

But they aren’t the only ones who can profit from this price increase. Rob Bakke, a Minnehaha alumnus (’84) and parent, and senior vice president at Bell Bank, said that companies often can benefit from these day-trading pumps.

“When the stock is so high, that would be the time for them to issue more stock,” said Bakke. “By issuing additional shares, they can get more dollars on their balance sheet.”

When hype drives the price up, though, people rush to sell and take their profits, driving the price back down. By the end of the pump, there are always winners who sell and losers who get caught “bag-holding,” or holding on as the price drops back down. With how risky day-trading can be, there’s a lot of potential for mishaps.

What young investors should do

Lessard believes that along with democratization should come learning.

“These trading platforms provide access to investing, but what they need to provide more of is education for their users,” said Lessard. “Teenage investors, like everyone else, must know how to do their due diligence on a company before buying stock.”

Bakke warns young people not to get impatient when investing.

“With younger generations, there’s often more of an urgency to get rich quick and take shortcuts, but that will eventually come back to bite you.”

Although, some investments aren’t made on a financial rationale at all, and that’s OK (if you can afford it). Tad Gullickson, Minnehaha alumnus (’84) and former asset management adviser at BlackRock, encourages amateur investors to be honest with themselves about their intentions.

“If you are investing for entertainment, that’s fine – just expect it to be the same as going to a casino if you don’t know what you’re doing,” said Gullickson. “Real investing is having a plan and allowing time to be your friend.”

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