Back in 2020, when the spread of coronavirus caused a downturn in economies worldwide and businesses were suffering due to lockdowns, the one industry that was booming was - securities trading.
When the pandemic struck, the Indian equity markets saw a huge spike in the number of registered new demat and trading accounts.
The Covid-19 pandemic spurred the millennials (25-40 years) and Gen-Z (18-24 years), many of them for the first time in their lives, to get started with self-directed investing.
The young and inexperienced investors saw the coronavirus downturn as an entry point into the world of investing.
Being at home, or because of furloughs, they had more time in hand to dedicate to investments that they didn’t necessarily have before.
Plus, for many people, stock markets seemed like a good way to earn some extra cash.
The innovation around trading fuelled by technology has really driven the accessibility of the markets.
This together with the rise of do-it-yourself (DIY) low-cost retail investment apps, the ease of availability of information and investing tools, and the influx of finance influencers have changed the point of view on how differently the younger generations are handling their finances from their parents and grandparents.
The tech-savvy millennials and Gen Z are a growing force in investing. From planning their own vacations to designing their own houses by taking inspiration from Pinterest boards, just like most things in their lives they are taking hands down approach to investing too - DIY.
They want direct control of their investments and are increasingly choosing to do their own research before they invest.
These digitally savvy investors are unafraid to challenge the status quo and are always looking for new and innovative ways to make their money work for them.
They are willing to take risks and are actively investing in non-traditional asset classes like equities, and even high-risk avenues like options trading, cryptocurrency, and NFTs.
But the question is - can one master investing and manage their portfolio with a few YouTube courses or by turning to social media for financial advice? Can they actually do investing on the side?
This is where it gets tricky.
Investing is both an art and a science. It requires special skills and a lot of research and time. When not done properly, it can often step into the territory of gambling.
Let us understand why it is risky for GenZ to jump on the DIY investing bandwagon.
With the disruption in the fintech space, there’s no dearth of mobile trading applications available in the market. Anyone can open a trading account by just clicking around a few buttons and start buying and selling stocks in a few minutes. All you need is a smartphone and a good internet connection.
We are living in times of over-information. While social media is powerful and is playing an important role in democratizing information, this unregulated medium often also borders on misinformation.
In investing, too many users are taking to social media to dole out stock and investing-related tips and tricks. Social media influencers are glamourising trading.
Consequently, platforms like YouTube, Facebook, and Instagram have become popular mediums to seek financial advice.
However, there’s no guarantee that the so-called “financial experts” on social media are experts in the real sense and are concerned about your financial well-being.
They are often paid by these online platforms to draw inexperienced investors into the riskiest trading.
The stock market run-up during the pandemic, coupled with low-brokerage offers by online brokers, added momentum to lottery-like investing behaviour.
Options trading, which was once used by only professional traders, has soared with the rise of new fintech platforms that have made it really easy to trade in options.
In the world of investing, if you do not know what you are doing, it’s almost speculation. The thrill from the volatility can be extremely entertaining, especially if the markets are on their northward journey.
The inexperienced young investors are simply clicking around and buying and selling based on the movements in the markets on a daily basis.
With easy access to margin trading, they’re even using leverage to speculate. In case you’re wondering, margin trading is a form of investing using borrowed money at a high-interest cost, which can quickly lead to steep losses.
These young investors often have no strategy and lack investing know-how. While a few may be lucky, most of them have no chance to be successful.
The ease of online trading and its popularity has even attracted a lot of college-aged users who are oblivious to the unseen dangers of such apps and the excessive risks it entails.
Many of them aspire to become full-time traders or already pursue it as a side gig for making a quick buck. While the disruption by the fintech players has made financial markets accessible to the masses, which was very much needed, it comes with its own set of problems.
In this new era of investing, the boundaries between gambling, gaming, and investing are being blurred.
There’s more to investing than just buying stocks or trading in derivatives. You need to understand your profile, and have a proper asset allocation plan.
It starts with defining your investment goals –both long-term and short-term, assigning a time frame for each goal, knowing the level of risk you are comfortable with, and then creating a diversified portfolio of investments.
When this generation of investors will get burnt by big losses, they could retreat from the markets entirely.
Historically this has always been the case with the new set of investors who tried to cash in during the bull market.
It is therefore important to have a layer of validation before investing –whether it is direct equities or mutual funds.
Having a financial advisor is not a bad thing. While one could always use investing apps and monitor portfolios, having an advisor will ensure your investments are aligned with your investment goals and profile.
Plus, they keep you in check when you get swayed by market movements or stand the risk of making hasty financial decisions or letting behavioural biases get the better of you.
It is ok for your investment journey to be boring. There’s a reason why buy and hold have been a popular strategy.
As for risk-savvy investors who like the thrill, if you are going to jump on a bandwagon because you don't want to miss out, my advice is to set aside a certain portion of your savings that you would be comfortable losing.
Don’t forget, when it comes to investing, diversifying is the key.
(The author of this article is the CSO of Arihant Capital Markets Limited)
Disclaimer: The views and recommendations given in this article are those of the author. These do not represent the views of MintGenie.