The UK boss of American stock broking giant Charles Schwab (SCHW) has warned new retail investors that many are at risk of “life changing” losses because of “naive investment decisions”.
Richard Flynn, the managing director of Charles Schwab UK, told Yahoo Finance UK that many of those new to the stock market had a poor understanding of how to approach risk management.
“That’s a key area of retail investing that is probably undersold, just how important risk management is, particularly in markets like this where there’s uncertainty, there can be quick volatility,” Flynn said.
“Something that’s really important to us as a business is educating clients and helping them understand that things like high inflation will impact their portfolios.
“I think it’s on everyone in our industry to do that because the consequences for new investors of making, not quite uninformed decisions but maybe naive investment decisions, can be really significant and life-changing.”
Millions of amateur investors have entered the stock market for the first time over the last year. Many have flocked to the Reddit forum r/WallStreetBets to share investment ideas and stock tips. In January, members of the forum successfully coordinated a buying blitz that drove up the share price of retailer GameStop (GME) and forced short sellers to abandon their bets against the company.
The same group of traders have since moved on to other companies including cinema chain AMC (AMC) and old school phone makers BlackBerry (BB) and Nokia (NOK), often pushing share prices to levels that confound analysts and traditional investors. These companies have been dubbed ‘meme stocks’ because of the importance of social media to their share price.
“We’ve had clients with multiple millions asking about meme stocks,” Flynn said. “We come back to that key guidance: FOMO and HODL are not investing strategies.”
FOMO — fear of missing out — and HODL — hold on for dear life — are part of the new lexicon developed by meme stocks traders on r/WallStreetBets. Neither strategy has much to say on risk management.
Robinhood (HOOD), a mobile brokerage closely associated with the WallStreetBets movement, this week went public in New York. Thursday’s $32bn (£23bn) IPO capped an explosive 18 months for Robinhood, which was only founded 2013. Funded accounts grew by 143% last year and revenue rose by 245%.
Robinhood and other investment platforms have benefited from a boom in retail investment around the world since the COVID-19 pandemic began.
Flyn said Schwab had seen “huge volumes of new clients, new people coming to investing for the first time in the last few years.”
Britain is Schwab’s biggest single country outside of the US, although the company doesn’t breakout specific numbers. Data published this week showed the top 10 investments apps in the UK have gained an estimated 1.6 million new users since March 2020.
Experts have put the rise in amateur investing down to excess savings built up during the pandemic, investment opportunities presented by market shocks, and sheer boredom, with millions of people stuck at home during lockdowns.
The boom has raised concerns among some lawmakers and campaigners who worry that new platforms like Robinhood are encouraging people to take irresponsible risks in pursuit of profits. Robinhood offers high risk products, a gamified app and charges no commission, encouraging people to trade regularly.
In one highly publicised case, 20-year-old American Alex Kearns died by apparent suicide after wracking up what he believed were losses of $750,000 trading complex options on Robinhood. In a note left to his family, he said he had “no clue about what I was doing,” according to the Financial Times. Robinhood has since vowed to reform its risk controls and provide more education to clients.
Flynn said Schwab had strict controls on the use of options by retail investors. He didn’t mention Robinhood or the Kearns case, but said broadly of options: “We would urge all retail brokers to remind themselves of their own responsibilities.”
Watch: Senator says Robinhood has ‘no economic interest in creating value for customers’