Stock market investors who are young, male or who use stop losses are more likely to trade frequently and reduce returns, according to new research.
Every time shares are bought or sold, the investor incurs transaction costs – so the more you trade, the chances are that you reduce your returns.
RMIT researcher Dr Daniel Richards, a lecturer in Wealth Management in the School of Accounting, and Gizelle Willows at the University of Cape Town investigated the characteristics of frequent trading investors.
Richards said: “When we looked at 7200 UK retail investors, we found that male and younger investors traded frequently. In addition, investors who sought investment advice and investors who used stop losses also traded frequently.
“So trading frequently could be part of an investor’s learning curve as being younger and using stop losses are associated with less experienced investors.”
The researchers also found that while a minority of investors traded very frequently, the majority traded seldom.
Willows said: “Half of the trading was initiated by only 10 per cent of investors, who traded about 69 times a year or more than five times a month.
“This is vastly different to 80 per cent of investors, who traded only six times a year or once every two months.”
The researchers concluded that curbing trading frequency should be a priority for investors and policy-makers.
Richards said: “These findings are important because they show that to reduce trading frequency, only a few investors need be targeted and that such efforts should start with male, young and stop loss-using investors.
“Thankfully, in Australia investors are encouraged to hold investments for longer than 12 months to reduce Capital Gains Tax liability. Such tax incentives have their value as they serve to discourage overly active trading behaviour.”
The researchers also investigated if use of the internet and phoning a call centre to trade was associated with increased trading behaviour.
They found that the online medium increased trading activity and that phoning a call centre to trade was also related to trading frequently.
Willows said: “This looks contradictory, but these findings suggest that investors who really want to trade will employ multiple mediums in order to do so.”
The research has been published in Global Finance Journal.
Story: David Glanz