It has been the most unlikely tech star of lockdown. While most people were spending their time posting pictures of freshly baked sourdough bread on Instagram, catching up on every box set Netflix had ever made, or figuring out how to get the audio and video to sync on Zoom, it turns out a significant number of us were doing something more productive with all that free time: trading furiously – and trying to make ourselves a fortune.
The share dealing app Robinhood has fuelled a massive rise in trading in the United States. Likewise, small investors have been piling into the markets in the UK, Germany and elsewhere. Sure, plenty of investment professionals will dismiss the new breed of individual investors as nothing more than a nuisance.
But in fact they can rescue capitalism. How? By bringing fresh money into the market; by bringing enthusiasm and knowledge to counter the trend to passive investing; and perhaps most of all by giving a new generation a stake in the free market’s ability to generate wealth. We should be doing everything we can to encourage them to stick around even after lockdown has ended.
Robinhood is the most visible success story of the investment boom. Mostly used by millenials – the average customer is just 31 – its free trading system has been a huge hit. Ever since lockdown started, account openings, and trades, have soared, and in a fund-raising round last week it was valued at $11bn (£8bn).
It is just one sign of the boom. More traditional American brokers have scrapped fees as well, and signed up millions of new customers. In this country, Hargreaves Lansdown, the most successful platform for private investors, has reported a surge in new accounts (188,000 in the last year).
So have German platforms. Malaysia is even considering controls on trading to dampen down the investment craze that has pushed its index to record highs. In the City and on Wall Street plenty of people will be tempted to agree with the Malaysians.
Private investors have long been regarded as a nuisance at best, and, at worst, a danger both to themselves and to the rest of us. We have started to see all the same old prejudices as a new generation have waded into the market. They are already starting to be blamed for rising volatility. They are getting the rap for the crazy valuations of a few of their favourite tech stocks.
Even a few suicides have been pinned on day trading after losses have been racked up. We can expect to hear a lot more about that if the upsurge of interest in investment continues.
Of course, we can understand why market professionals don’t like private investors. They just clutter up the market, and they don’t generate much money. Indeed, their preference for free trading squeezes margins.
Neither, on the whole, do big companies. They are just a bother. Life is much easier if the chief executive can keep the shareholders happy over a discreet lunch. You can do that with half a dozen big institutions. With thousands of day traders, forget it. But we should ignore all that.
The new generation of traders are the best thing to happen to the market in years. First, they are bringing fresh money and, perhaps more importantly, people into the market. With the decline of private investment, with the closure of final salary pension schemes linked to the market, and falling levels of home ownership, millenials have increasingly been locked out of the main ways free market capitalism creates wealth.
But as Amazon and Apple soar in value, it is not just going to be a few hedge funds and institutions that make a lot of money. It will be the millions of small investors, and mainly younger ones, who have invested as well. Is that a bad thing? Of course not.
Robinhood took its name from the man who famously stood for re-distributing money from the rich to the poor. Equity ownership is a far better way of doing that than highway robberies (or indeed its modern equivalent wealth taxes). In truth, private investment will finally start spreading the rewards of the system more widely – and that is long overdue.
Next, they bring lots of fresh information and enthusiasm to the market. Another big problem for all the main equity markets has been the rise of passive investing. The institutions have convinced themselves they can never beat the market so they just buy an index.
The Robinhood traders swap information feverishly, and back their own experiences and hunches. Should Tesla really be worth more than Toyota and Volkswagen?
The professionals scoff that is a bubble waiting to burst, but the small traders think it is the Apple of transport and are buying into that vision. Maybe they are right, and maybe they are not. The debate is far healthier than simply buying an ETF off the Dow.
Finally, they are far more committed to the companies they invest in, a lot more interested in small businesses, and are typically willing to back their favourites over the long term. The resurrection of the private investor started in the crowd-funding market, where thousands of start-ups tapped up investors who didn’t mind taking a risk on an ambitious idea for a new business.
The day traders have the same spirit. Typically, they back companies because they know the product, and think it’s great. That is a healthy corrective to the risk-averse, safety-first approach of the big fund management houses.
In truth, small individual shareholders have usually been far better investors than institutions. Over the past 30 years their numbers have declined, and so has the number of listed companies. The result? An equity market that looks about as lively as a nightclub during lockdown.
If the craze for equity trading survives, and keeps going even after we finally return to normality, it will create a far healthier market. Far from being a danger to anyone, the Robinhood traders may well end up saving capitalism for all of us.