The coronavirus has wrought devastating harm to the health of our nation and to the vibrancy of our economy. With respect to financial markets, it has also given rise to a full-blown mania. Individuals, cooped up at home, working remotely on flexible schedules, with no social activities and no live sports to watch and bet on, have increasingly turned to day trading in the stock market. Spurred by the fintech firm Robinhood and embraced by establishment giants such as Schwab and E*Trade, zero commissions are now the rule. And day trading has now supplanted sports betting for thousands of millennials and members of Gen Z who are sheltering at home in response to COVID-19.
These new market participants have very likely contributed to the extreme volatility that has recently characterized stock prices. Professional investors, such as the legendary Howard Marks and Warren Buffett, have been extremely cautious as the economy has entered into a deep recession, and they have actually been selling equities. But legions of new day traders have poured new money into stocks without a care for the risks involved, clearly unaware of Buffett’s maxim that “It’s only when the tide goes out that you learn who’s been swimming naked.”
The day traders’ frenzied buying has been most evident in individual issues. Two of the most popular stocks on the Robinhood trading platform in recent weeks have been FANGDD Network Group, the Chinese online real estate company with a name that conjures up the popular FANG stocks, and Hertz, the bankrupt car rental company. FANGDD rose from less than $6 a share to almost $130 during one period, only to fall back to $11, where it has currently been trading. Hertz has more than doubled in recent trading sessions. Day traders appear to be unaware that bankruptcy usually results in extinguishment of the stake of the current equity holders.
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