The ability to put just a few extra bucks into stocks. A pandemic panic that drove stock prices way down for many companies that have a future ahead. Easy to use apps.
And throw in a little extra cash via government stimulus checks and some extra time when major league sports teams stopped playing during the pandemic, you couldn't see a movie at a theater and college graduates started working remotely back home.
All of those factors contributed to growth among new investors in 2020.
Sure, many of us who are accustomed to setting aside a little bit of each paycheck in our 401(k) plans didn't see this one coming. Maybe we heard a college student in the family talking about stock picks. We certainly couldn't help but notice as we watched the GameStop battle unfold in the headlines in January.
But now you've got to wonder who are all these new investors, many times younger investors, who seem to have some power to move markets?
'Perfect storm' for new investors
More than 10 million new brokerage accounts were opened by individuals in 2020 — more than ever in a year, according to an estimate by Devin Ryan, equity research analyst at JMP Securities.
Last year created the "perfect storm" for investing, Ryan wrote. The brokerage industry moved toward zero on commission rates late in 2019, making it less expensive to invest, and there was an "unprecedented backdrop created by the COVID-19 pandemic."
We saw extreme market volatility, more people working from their home offices and kitchen tables, and more digital transformation, including the customer's willingness to trade stocks via brokerage apps.
Hezekiah Lockridge, 21, opened his first brokerage account in late 2020 after his mentor at his company, Citizens Bank, suggested that he try out the stock market. He uses a brokerage app.
He owns one stock, Apple, and plans to invest in other stocks, possibly in a smaller upstart, at some point. He has about $2,000 in a brokerage account, half in Apple.
Lockridge graduated in December 2019 from the University of Michigan-Dearborn with a degree in finance. And he remembers going to school and hearing it drilled into his head that people need to save for retirement early in life and take some risks to be able to retire comfortably at age 65.
"Right now, having it in a savings account doesn't get you anywhere," said Lockridge, who lives at home in Ypsilanti, Michigan, and works remotely.
Low interest rates, even with CDs, aren't very helpful to savers.
"The stock market is the only option to grow your money."
New investors are younger, more diverse
A newly released report called "Investing 2020: New Accounts and the People Who Opened Them" outlines some interesting trends.
New investors tend to be young, lower income and more racially and ethnically diverse, according to the collaboration by the FINRA Investor Education Foundation and NORC at the University of Chicago.
The study was done in October 2020 after the market meltdown in March but before the wild show in January where everyone watched the battle between the hedge funds and everyday traders.
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GameStop's stock price hit $483 a share in trading on Jan. 28. The videogame seller closed at $325 a share on Jan. 29 — its highest price after a social media frenzy where investors on Reddit's WallStreetBets drove the stock higher and higher.
Back in early October, GameStop was trading around the $9 a share range.
But the first week of February proved to be brutal with GameStop trading around $70 a share.
The research involved surveying 1,291 households from NORC’s probability-based panel. The survey was fielded between Oct. 26 and Nov. 13, 2020.
Based on the survey, 57% of the respondents opened a new taxable investment account in 2020. Among investors who opened a new account in 2020 in the sample, 66% were new investors who had not previously owned a taxable investment account, making this their first experience buying stocks in a taxable account.
Here's a look at some stats:
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The majority of new investors are white. But the report indicated that 17% of new investors last year were Black, while 15% were Hispanic/Latino and 10% were Asian.
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About 33% of the account balances for new investors had less than $500. This is money outside of any 401(k) or tax-favored retirement account. If you break it down to new adult investors who are younger than 30, the study indicates that 41% had less than $500 in stocks in taxable accounts.
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Many new investors aren't making anything close to six figures. The study noted 24% of new investors earned less than $35,000. That compares with 7% who are experienced investors who opened a new account in 2020 but had an investing account earlier.
Many factors are helping those who don't have big paychecks to play the market. The hurdle isn't as high as it was years ago now that several brokerages offer no-minimum and low-minimum balance brokerage accounts. No-commission trades cut down an investor's cost, too.
"Some of these new brokerages have offered opportunities to enter the stock market that haven't been there before," said Angela Fontes, vice president of Behavioral and Economic Analysis and Decision-making at at NORC at the University of Chicago.
Many communities that have been under-represented in investing, including Black households and Hispanic/Latino households, are able to invest and open a brokerage account without having $25,000 or so to invest, as they might have needed in the past, she said.
Why are newcomers investing?
While many were shaking in their boots about what could happen next to their 401(k)s in March, many younger investors decided to take a chance and shop for possible bargains.
Joseph Mutone, 22, said he decided to buy stocks when he heard the market was crashing back in March 2020 as fear of the pandemic's impact on the U.S. economy flourished.
Mutone, who graduated with a degree in music from the University of Michigan in Ann Arbor in May, said he first opened a brokerage account in 2019. But he didn't do any investing.
The app remained on his phone and the market meltdown motivated him to reactivate that account.
"I didn't do too bad," said Mutone, who is now working toward a master of accounting degree at Oakland University and working as a tax intern for PwC.
He bought stock in ONEOK, an owner of one of the nation’s premier natural gas liquids systems, at around $27 a share in mid-March last year. It was trading around $42.50 a share in early February — a gain of around 57% in less than a year.
Mutone, who lives in Bloomfield Township with his parents, said he started investing with less than $3,000. He had saved the money from his job working as a church organist.
He does his own research and uses the Seeking Alpha app for news and information. He talks with his dad about his strategies.
"People are starting to see there is a lot of benefit to investing," Mutone said. "I've been getting calls from my friends asking me how do you get started."
Some younger investors seem to add a social component to investing, Fontes said.
The report noted that 51% of people age 18 to 29 years old said they opened a new investment account in 2020 after receiving a suggestion from a friend. And 31% acted after a suggestion from a family member.
Mark Lush, manager and behavioral scientist in the Behavioral and Economic Analysis and Decision-Making team at NORC at the University of Chicago, said the big dip in the stock market at the beginning of the pandemic drove a lot of interest in stocks.
People who opened new brokerage accounts in 2020 gave three common reasons: The ability to invest with a small amount of money (35%), wanting to invest for retirement (27%), and dips in the market that made stocks cheaper to buy (26%).
And 19% reported that they had received some money, perhaps including stimulus cash, that gave them extra cash to invest. About 12% said they had money from a sign-up bonus.
What are the risks ahead?
On the downside, experts say, research indicates that there's a lower level of investor literacy among new investors who opened a taxable account for the first time in 2020.
"What we're seeing is they're actually saying one of the actual reasons they're opening an account is to learn about investing, which is sort of interesting," Fontes said. "This is one of the goals."
On the one hand, you might find it odd that people risk their money perhaps before learning about investing. But I understand the logic, especially if you're putting a small amount of money at risk.
I'm not a wonderful baker or cook, like my mother or sister. Over years, though, I've learned quite a bit. And I didn't learn how to bake lemon bars or cook chili just by reading a recipe.
If you want to bake or cook, you've got to make discoveries along the way and deal with a few flops. (Key tip: Adding some chopped chipotle peppers to a recipe does not mean the recipe calls for dumping in an entire can.)
With anything, it is important to keep learning and try to correct any mistakes along the way.
New investors more frequently relied on the advice of friends and family, instead of financial professionals or their own personal research. But many used a variety of information sources, as well.
The survey noted that 14% of brand new investors turned to social media when making investment decisions; 27% turned to the news media and 38% turned to friends and family.
And 10% of new investors said they turned to online chats to get stock tips and investing advice.
"Those numbers might be a little higher now," Gary Mottola, FINRA Foundation research director, said referring to the publicity that online sites like Reddit's WallStreetBets received as part of the GameStop frenzy.
More financial literacy is needed. A free e-learning program for new investors is at https://ift.tt/3tDumvs.
"It's really important for new investors to understand risk," Mottola said.
Mottolla told me that some new investors are showing a bit of a disconnect between their goals and their game plans.
More than half of new investors, Mottola noted, said they were buying stocks as a way to save money for retirement.
But oddly enough, the new investors are using taxable, non-retirement accounts to invest. They could be missing out on the important tax breaks offered to retirement savers who set aside money in a 401(k) plan, a Roth IRA or a traditional IRA.
And 23% said they're saving for an upcoming expense, such as paying for a wedding or buying a car. Yet are those investors underestimating the short-term risks and overlooking the real possibility that they could lose a good deal of their money in the short term if stock prices fall?
A key investment tip: You shouldn't sacrifice money you can't afford to lose, if you're chasing short-term returns.
Mottola noted that most investors reported they were willing to take average financial risks expecting to earn average returns. But they might have been taking on greater risk than they realized.
Most new investors (64%) were taking on greater risk by using their brokerage accounts to buy individual company stocks, not more broadly diversified mutual funds. Only 28% of new investors were using the brokerage accounts to buy mutual funds.
You've got to know your goals and get a game plan that will get you there.
Contact Susan Tompor via stompor@freepress.com. Follow her on Twitter @tompor.
This article originally appeared on Detroit Free Press: Stock market flooded with new investors during COVID-19
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