The markets rose and then fell last week to finish down slightly. Concerns about the delta variant continue to impact the markets, along with uncertainty around Federal Reserve Bank actions. Jobless claims increased slightly as well. On the flip side, industrial production has risen above pre-pandemic levels, small business confidence is rising, and month-over-month retail sales reported 1.6% above expectations.
And all of this clearly means you need to whip out your phone, open an app and begin investing, right? Maybe not so fast. I think it is wonderful that more people are becoming investors and are learning about the stock market. I have two concerns with the current trends.
Investing is by definition a long-term proposition. There’s no such thing as a short-term investment. Investing is doing something with your money that is intended to make more money (a true passive income source). For example, I research companies and believe that Spacely Sprockets is well run, has good products, and will continue to grow. Buying shares of Spacely Sprockets and holding on to them while the stock price increases over time is investing. I may also believe that Cogswell Cogs is an established company that turns out a commodity product and will continue to pay good dividends. Buying shares of Cogswell Cogs to hold and collect dividends while the stock price remains about the same or grows slightly is also investing.
Buying companies based on social media hype and then selling them a few days or weeks later, then buying some other stock I heard about online is not investing. It’s gambling. And many of the trading apps have made it into a game, giving traders a dopamine hit with every trade, showering confetti on their screens.
The other issue is that free trading is not free. There may not be a brokerage commission, but you are paying for the trade. There is a long-standing practice called payment for order flow. When you buy or sell a stock, there is a middleman called a market maker. If I sell my car to someone, I’m selling it directly to that individual. When stocks are being sold, there are often thousands of shares being offered for sale and being bought. The market maker buys them at one price and sells them at another.
When stocks used to be quoted in fractions, meaning a stock sold for 25 and 3/8 dollars, for example, there was something called a bid-offer spread. You buy with a bid and sell with an offer. The difference was the profit to the market maker. In 2002, the market went to decimals, and the math behind market-making is much more complex.
Brokerage firms don’t actually buy and sell the stocks. They send the order to a market making firm, which in turn pays the brokerage firm. The retail investor is not guaranteed the best price for their trade. The market maker is free to buy or sell at whatever spread they can get. And it’s not transparent. When you add in the extreme volatility that can occur with options trading, the spread can become significant.
We don’t know exactly what the costs are to retail investors. We do know that Bloomberg Intelligence reported that these order flow payments to brokerage firms increased 39% to $1.16 billion in just the first quarter of 2021.
As always, we recommend a diversified portfolio that is aligned with your goals. It’s generally the time in the market that gives the best return, not timing the market.
Your action to take this week is to make a grocery list. Making a plan and shopping from a list can help control your spending on groceries. You can also register for more educational events on our website at covingtonalsina.com. Be sure to check out our Facebook page for more information.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, contact the appropriate qualified professional prior to making a decision.