While there’s been a spike of first-time investors in the stock market during the Covid-19 pandemic, an economist is cautioning people to do their homework first before taking advantage of the “exciting opportunity”.
Infometrics senior economist Brad Olsen said one driver behind the growing number of people entering the share market was low bank savings rates.
“People are going, 'look, I’m not making much money by keeping my cash in the bank. I need to find something more active, something that gives me a better return'.”
Mr Olsen said newer platforms like Sharesies were also helping drive new interest in the stock market because people could easily access it.
But, he said this meant first-time non-professional traders would have different goals and circumstances than stockbrokers or day traders.
“For a lot of people, I’d expect they won’t be looking at trading large volumes of stocks day to day. They’ll probably be looking at a few months to a few years, if not longer.”
Mr Olsen said people needed to look at their goals for entering the market instead, whether that be to collect dividends or act as a place to put money in for a period of time. People’s options ranged from investing in individual companies, index funds, to putting money in a managed fund for others to invest on their behalf.
Because of the difference in goals, he said people could ride out day-to-day fluctuations in the market, especially as economies began to emerge from the pandemic.
But, with human behaviour being a “key driver” in market activity, Mr Olsen said it was important people “kept their wits about them”.
“A lot of people, and we’ve seen this with KiwiSaver, may well think that when the price goes down, their investment isn’t worth anything so it needs to sell,” he said.
“They probably need to take some proper advice on that. It’s important to remember you only lock in that lower price if you sell."
He said people looking to invest needed to be aware of the tendency to react quickly, which was seen when some people moved their KiwiSaver from a growth fund to a conservative fund during the market’s downturn at the onset of the pandemic, locking in the losses.
“Given the speed Covid-19 has ripped through the world, people are highly reactionary at the moment … always looking for the next thing, trying to understand what the latest data point or the last latest bit of news means."
Mr Olsen said people needed to understand their tolerance for risk as an investor so they could better place their money.
“If you're confident that you can tolerate that balance between risk and return, (the stock market) is definitely an exciting opportunity for many to look at," he said.
“I'm certainly not trying to dissuade anyone from giving the stock market a crack, but I don't think it’s a thing I would just go and have a little play with.
“I'd want to do a lot more homework than that.”
He encouraged people to look for learning resources online.
“What I’d probably do for at least the first week, before putting money anywhere, is just watch what happens to the stock market,” Mr Olsen said.
“Understand what some of the motivations have been. Look at some of the companies you might be interested in and understand what their current profile is.”
He said this meant looking at aspects like a company’s earnings outlook as well as whether it paid dividends.
“It wouldn’t be the time that I would want to invest all of my life savings into a company on a whim … just because people at the moment are looking for where to put their money.”
Mr Olsen also encouraged people to seek professional advice before entering the stock market so they could understand what they were getting into.
“I say that because back in (October) 1987 when the stock market crashed , a huge number of New Zealanders who had gone very quickly in the stock market lost a lot of money.
“In my mind, it’s one of the reasons New Zealanders don’t invest to the same degree as people in other countries … and instead we focused on housing and property.”
The New Zealand stock exchange saw record sales in recent months. In mid-April, more than 200,000 trades were made in a week, more than triple the rate the same time last year.
There’s been a strong run in recent weeks, with new investors entering the market, but that hit a wall today. (Source: Other)
In March, as the Covid-19 pandemic caused stocks to crash at rates not seen since the 2008 Global Financial Crisis, people had been taking advantage of cheaper shares.
Online investment service Sharesies also saw a surge in demand since mid-March, with co-founder Leighton Roberts on-boarding 75,000 new investors.
“So with that comes much higher levels of trading volume and a lot of interest in New Zealand companies,” Mr Roberts said.
He said first-time investors were buying, on average, $3000 worth of shares on the Sharesies service.
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