Markets

Young investors pile into stocks, seeing 'generational-buying moment' instead of risk

Key Points
  • The major online brokers — Charles Schwab, TD Ameritrade, Etrade and Robinhood — saw new accounts spike in the first quarter, when stocks experienced a dismal rout and subsequent rebound. 
  • The new accounts may represent "new investors who sense a generational-buying moment but do not have much background in the equity space," said Citi chief U.S. equity strategist Tobias Levkovich.
Andrew Harrer | Bloomberg | Getty Images

The coronavirus market downturn spurred young people — in some cases, for the first time in their lives — to get started with investing.

A spike in new accounts at online brokers show that young and inexperienced investors saw the coronavirus downturn as an entry point into the world of investing and not a time to hunker down.

"New investors who sense a generational-buying moment but do not have much background in the equity space," Citi chief U.S. equity strategist Tobias Levkovich said in a note to clients. "We have heard anecdotally about younger individuals with less market experience viewing the March plunge as a unique time to start portfolios and often crowding into the tech arena, purchasing the stocks whose services or products they know and use."

The major online brokers — Charles Schwab, TD Ameritrade, Etrade and Robinhood — saw new accounts grow as much as 170% in the first quarter, when stocks experienced the fastest bear market and the worst first quarter in history.

But young people apparently saw it as an opportunity and began buying familiar technology stocks.

In March, stocks started to rebound led by resilient tech stocks. There were also hopes that slowly reopening the economy and a Covid-19 treatment will create a path to recovery.

'Monumental volumes'

The major online brokers saw a major jump in new users during the coronavirus sell-off, bolstered by zero commissions and fractional trades.

Charles Schwab CEO Walt Bettinger said in an earnings release the broker saw "monumental volumes" of trading from the 609,000 new broker accounts added in the first quarter, with over 280,000 in March alone. The quarter included 27 of the 30 highest volume days in Schwab's history. 

TD Ameritrade — which is set to be acquired by Schwab — said last month that retail clients opened a record 608,000 new funded accounts in the first quarter, with more than two-thirds of those opened in March. The e-broker's new accounts proved to "skew younger" over the last quarter," TD Ameritrade chief market strategist JJ Kinahan told CNBC. 

"Perhaps because they're home or perhaps because of furloughs, they also have time to dedicate to their investments that they didn't necessarily have before," Kinahan added. 

ETrade, which is set to be acquired by Morgan Stanley, saw a gain of 363,000 accounts in the quarter, a company record. 

"I think a lot of the innovation around trading commissions has really driven the accessibility of the markets for everyone and clearly that cohort, the younger ones, are seeing it for the first time in the headlines everyday, 'massive market drop,' so the combination of current events, innovation of trading and technology have really driven this whole movement," Tim Welsh, founder and CEO of wealth management consulting firm Nexus Strategy, told CNBC. 

Robinhood users soar

Robinhood — millennial favored stock trading app — saw a mind-blowing 3 million new accounts in the first quarter, despite glitches and crashes on heavy trading volume days. 

"The access to trading, there are no barriers to entry anymore, its on your phone, you can buy whatever you want, fractional shares are available so if you can't pony up $1,400 to buy one shares of Google you can still own the FANG stocks," Welsh added. 

Stock positions at the Silicon Valley start-up have nearly tripled since the end of last year. 

With the major inflow of new market participants, the market chugged higher, led by the companies young people know and love. 

Narrow, tech-led rally

All three major averages have joined the marker comeback, but the technology-heavy Nasdaq Composite is in the green for the year.

The technology darlings that have carried the market over much of the last decade — Facebook, Apple, Microsoft, Amazon, Netflix and Alphabet — are leading stocks out of the coronavirus trenches. Shares of Netflix are up 36% and Amazon is up 30% this year. 

Wall Street is skeptical if this rebound is the real start to the next bull market, given its narrowness. Some analysts are confident stocks will retest their lows when the full economic picture is realized. 

TD Ameritrade investors "have been doing a pretty good job choosing technology stocks," said Kinahan. "In this last month, Apple was one of the stocks that stood out in terms of millennial clients compared to our overall client base and Apple performed pretty well in that time frame."

"You saw Microsoft, some of the banks, Disney, as the big ones in that time frame. These companies that tend to sit on cash, said Kinahan. TD Ameritrade clients also picked some beaten down oil stocks. 

Investor newbies are also piling into the beaten down airlines and cruise lines, according to Robintracker, which tracks Robinhood account activity but is not affiliated with the company.

Market participants have increased positions in American Airlines, Delta Air Lines, United Air lines, Carnival Cruises and Norwegian Cruise lines the most of any stocks in the past month. 

"In the height in March of things that were going very poorly, our millennial clients led the way buying Carnival cruise lines and at the time people are like 'oh my God, how can they do that?' Yet, they went and saw the opportunity where many of perhaps our older clients did not necessarily see that opportunity when the stock was trading sub $8," Kinahan added. 

Michael Krause, chief investment officer at Counterpoint Mutual Funds, said this strategy may not be a safe long term bet. 

"Traders here are 'buying the dip' in a lot of names with questionable fundamentals now, i.e. airlines, highly volatile stocks, low in recent price momentum, and ones with that have recently (in the last 3 months) had lottery ticket like upside payoffs occur," added Krause. "Robinhood investors are making all the classic mistakes in the short term. May work for today's market, but not in the long-run if repeated."

'Almost gambling'

Hundreds of thousands of market newcomers is great for the democratization of the stock market; however, with newness comes a lot to learn. 

"If you don't know what your doing, its almost gambling, its almost speculation, and that sounds like fun...you experience very quick run-ups and rundowns," said Welsh. "It's entertainment." 

Welsh said the danger is if younger investors are betting money they have allocated for their mortgage, as opposed to extra money laying around they would have bet on sporting events, if they weren't cancelled. 

"That more you trade the worse you do. There's buy and hold for a reason and anyone who's inexperienced and is just clicking around and buying and selling based on the movements in the markets on a daily basis really have no chance to be successful."

To be sure, the major online brokers all dropped commissions last year, which is also driving user growth. 

—with reporting from CNBC's Crystal Mercedes and Michael Bloom. 

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