Yahoo Finance Futures and options for young retail investors beyond plain stocks
Buying a single stock can be a risky move for novice investors. What can new investors do to diversify their portfolios?
From education to work, the pandemic has accelerated digital adoption across many aspects of life. For Generation Z, or those born between 1996 and 2010, the pandemic has pushed them to do more with their time online, especially when the lockdowns cancelled plans both at home and abroad.
The circuit breaker and work-from-home policies gave young investors more personal time, says Wilfred Lim, head of strategy, investment solutions at PhillipCapital. “In addition, there was a lack of avenues for them to spend on entertainment. As such, young investors found themselves with more disposable income, which could be deployed into investments.”
Seizing this market demand, new digital brokers entered Singapore, offering mobile apps that were intuitive for younger investors, says Jeremy Tan, chief investment officer, Tiger Brokers (Singapore). “These new digital brokers required low initial investments, allowing new investors to enter the scene with smaller financial commitments. As such, they lowered the perceived barriers of entry for young investors to start trading and investing.”
There was also a speculative environment before the Omicron variant, says Lim. “The markets rebounded relatively quickly, with a V-shaped recovery in 2020-2021. The quick turnaround created a perception that investment was a way to make quick and easy money.”
What are young investors buying?
PhillipCapital and Tiger Brokers (Singapore) represent two extremes of the brokerage scene here. One is a legacy institution founded and headquartered in Singapore in 1975, while the other is a digital challenger that set up shop in February 2020.
However, both brokerages share a foresight in embracing digitalisation. PhillipCapital was the first to introduce an Internet trading platform in Singapore with the launch of POEMS in 1996, while Tiger Brokers seized global demand early in the pandemic, amassing nearly 1.9 million account holders as of March 2022.
Speaking at The Edge Singapore’s Brokers' Digest livestream on Aug 29, Lim and Tan outlined the typical journey for these new investors.
According to Lim, younger investors are keen to take greater risks, whereas mature investors prefer steady returns or even capital preservation. Young investors prefer stocks they are familiar with, such as Singapore’s banks and large-cap US tech companies. Perhaps due to financial influencers on social media, young investors here also prefer Tesla, Twitter and the so-called “meme stock” AMC Entertainment, Lim adds.
To equities and beyond
But buying a single stock can be a risky move for novice investors. What investors can do is to diversify. According to the experts, exchange-traded funds (ETFs) can help with diversification. These are financial products invested in a basket of underlying stocks. “These provide shelter against volatility by combining a portfolio of diversified stocks,” says Tan.
Lim adds that young investors should also consider unit trusts (UTs). “UTs and ETFs allow young investors to engage in sectorial investing; either by country, such as the US or Singapore; industry, such as gaming or blockchain technology; or theme, such as environmental, social and governance (ESG) investing.”
Those who have already cut their teeth on the assets above may also consider futures and options trading.
Lim explains: “With as little jargon as possible, futures are contracts between two parties to transact an asset or security in the future at a specific date and price. This transaction must take place at the specified date regardless of the market price.”
He adds: “Options are similar to futures, except that the agreed transaction does not need to take place unless a certain market price is met.”
These asset classes allow participants to hedge against investment risk, says Lim. “For example, airlines that anticipated higher oil prices were able to partially lock-in their fuel costs earlier this year at US$70/barrel instead of paying US$130/barrel at market-highs.”
Futures and options also let participants engage in price speculation. “For example, traders who believe that the markets will fall due to recession can sell S&P futures or buy stock put options without having to borrow shares for shorting.”
Options may also be a source of income, Lim adds. “For example, long-term investors holding on to existing equities, while believing that markets will not go higher in the short term, can sell call options to generate income through option premiums.”
Tan explains this “protective put”: “In essence, it is buying an insurance over one’s portfolio position, or a covered call, which allows investors to enhance yield portfolio position.”
Then there are the micro-sized contracts such as the Micro E-mini S&P 500 (MES) and Micro E-mini Nasdaq 100 (MNQ), which allow investors to access the futures and options markets for a fraction of the upfront financial commitment. Exchanges do this by splitting a standard-sized contract into smaller units for retail investors.
Tan concludes: “Futures and options are instruments that investors use for hedging or speculative purposes, and can be utilised to implement their view of the market direction within a defined period in a cost-effective manner.”
Guarding against emotional investing
For young investors wading into more complicated asset classes, Lim reminds them to stay disciplined when they invest. “It is important that we remember to be quite mindful of our investment decisions, and have self-awareness of our psychological tendencies.”
Investors may go through a rollercoaster of emotions when trading, says Lim. “Riding the rollercoaster is not easy and it is natural for us to feel some form of emotion when we look at the performance of our assets — from jubilation in a bull market to disappointment in a bear market — and make decisions based on these emotions.”
Emotional and mental stress can also have an impact on a young investor’s personal life, says Lim. According to a 2021 survey conducted by US personal finance website MagnifyMoney, some 85% of Generation Z investors have regretted a decision made based on emotion, and 58% have lost sleep worrying about the stock market.
There are thousands of strategies and instruments available, says Lim. “What’s most important is finding one that is aligned with your psychological tendencies and of course your financial situation.”
Investor education is key. Besides news publications and investing influencers, global exchanges also put out tips on trading techniques, product information and broad market trends.
To protect against potential greed, young investors can build a proper trading strategy, says Lim. “On the other hand, to combat the fear of loss, young investors can consider diversified value investing.”
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