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  1. Home
  2. / Investing
  3. / Stocks

Does the Surge in Retail Traders Signal an Inevitable Market Collapse?

With the elimination of commissions, you can 'play' for free as long as you have capital.
By JAMES "REV SHARK" DEPORRE
Aug 06, 2020 | 12:00 PM EDT
Stocks quotes in this article: SCHW

Whenever there is a surge in speculative trading by individual traders the traditional Wall Street pundits say "this will end badly." The logic is this is "dumb money" that is overly emotional and doesn't know how the market really operates. When these folks are rushing to buy it's a contrary indicator and the market is heading for a fall.

That certainly was the case in 1999-2000 when the internet bubble took place and it seemed that everyone was a stock market genius. When the collapse occurred a vast majority of the folks suffered major losses and abandoned the market for good.

Is the current action a reply of 1999-2000? Are all these newly minted Robinhood traders going to be wiped out when the market goes through the next corrective cycle? Will they give up on trading and find some other form of entertainment?

It is likely that there are going to be plenty of individual traders who suffer losses and give up but there are structural changes and societal shifts that favor a continuation of increased individual trading.

One of the major changes in the market in the past year or so is the elimination of commissions. There are very few transaction costs and that makes trading a little different than any other form of entertainment. You can "play" for free as long as you have capital.

Not only have apps such as Robinhood made trading easy but they also allow for the buying of fractional shares. Traditional brokers like Charles Schwab (SCHW) also allow for this. Limited capital is not an obstacle and it is easier for the small trader to diversify their risk a little.

Traders that have had a taste of this action are likely to find it as appealing as sports gambling and with apps like Robinhood, they can participate in it on a random basis. Back in 2000, traders closed those brokerage accounts as they had to deal with more administrative hassle.

Traders such as Barstool's Dave Portnoy are ripe for disdain from traditional Wall Street because they are openly mocking "the suits." It is schtick and it covers up the seriousness of the pursuit for many, if not most, of these new traders.

Is this going to end badly? All bull markets end badly. That is the nature of the cycle but I suspect that many of these individual traders will stick around and that they will have an ongoing impact on the way the market trades.

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At the time of publication, Rev Shark had no positions in any securities mentioned.

TAGS: Investing | Markets | Small Cap | Stocks | Trading | U.S. Equity

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