The story of an army of retail day traders taking down large hedge funds has captured America's attention. Since the pandemic began millions of Americans, stuck at home, have begun trading stocks. Day trading individual securities is very risky, especially if you don't have experience. The story is seen as the little guy taking down the big, bad hedge fund. In fact, in markets there are rarely heroes or villains, just people trying to make money and taking risk to do so.
Democratizing stock ownership is a laudable goal, but day trading stocks probably doesn't make sense for the average American. Financial economists generally warn against buying individual stocks since it means more risk and a smaller average return. They advocate buying mutual funds, which contain many stocks. They, on average, do better and are much less risky.
The good news is stock ownership has been trending up the last few decades and most Americans are well-diversified. The figure below is the share of Americans invested in markets from the Fed's Survey of Consumer finances. About half of Americans have some equity exposure, often through their retirement accounts and most own mutual funds. Between 15 and 20% of American buy individual stocks, though that figure is probably higher today. Retail stock speculation increases when the market goes up, but falls and takes years to recover when the market crashes and investors get burned.
Allison Schrager is a senior fellow at the Manhattan Institute. Follow her on Twitter here.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.
Photo by Spencer Platt/Getty Images