Lockdown boredom, fee-free trading apps and market volatility make for a lethal combination. Since the start of the pandemic, an increasing number of young people have started dabbling in the stock market – myself included.
Investing app Freetrade saw trading volumes double in February and March of 2020, while Trading 212 has temporarily stopped taking on new members after the GameStop saga resulted in a surge of sign-ups from wannabe investors.
Many amateur investors lost money on GameStop, while others only made small gains. One Redditor wrote: “I, an 18-year-old student, rode from 3k to 22k to 3.1k. My father told me 100x to sell.” The user assumed the stock “still had momentum”, but now feels “stupid”. “Am I just damned to be a bad trader?” they wondered.
The internet is rife with similar stories, but rather than serving as a warning of stock market volatility, it seems to have inspired even more people to get started – whether they know what they’re doing or not.
I first started investing in October, after reading articles about the true cost of delaying investing and how women can end up missing out on £1 million over our lifetimes due to a lack of financial confidence. At first, I bought individual stocks with established companies like Apple and Easyjet, along with exchange-traded funds (ETFs), which experts say are ideal for beginners like me. I’d read about the importance of diversifying your portfolio and gave myself a smug pat on the back for not putting all my eggs in one basket.
Then I joined trading and investing Facebook groups, which is when I was introduced to penny stocks. Think: cheap shares in very small companies you’ve probably never heard of. If you’ve seen The Wolf of Wall Street, you might remember that Jordan Belfort was an expert at trading these low-value stocks and making people think they could get rich by investing in them.
I told myself I’d take everything with a pinch of salt, but was surprised at how quickly I got drawn into the hype. People kept sharing screenshots of their portfolios and talking about how quickly they’d made a profit. There was a sense of urgency; I got scared I’d miss out. A few days before Christmas, I bought ten shares in a company called Alpine 4 Technologies (ALPP) for $2.67 (£1.94) each. People kept saying they’d reach $3 (£2.18) within days. A friend asked me what the company does, and I replied: “Something about drones, I think.”
I spent £200 in total across several tech stocks predicted to be the “next big thing”. I was reminded of that scene in The Wolf of Wall Street where Belfort describes a company as a “cutting-edge tech firm [...] awaiting imminent patent approval on a new generation of radar equipment”, before the camera cuts to a shed with the company’s name nailed to it – but I shrugged it off.
Paul is a 30-year-old money blogger who considers himself “quite astute and careful with investing and managing money”, but with the help of a £40,000 inheritance he started buying penny stocks too.
When we spoke, he was £3,798 down after also investing in ALPP. At first, Paul bought around 1,600 of these shares for $7 (£5.10) each. When the value of them increased, he started buying more. “People were saying it would rise over $10 (£7.28) a share, and saying they’d be listed on NASDAQ any day now.”
He’d already spent £10,000 on ALPP shares in total, adding: “It was like a slot machine. I had more money to play with than ever before.”
As promised, the value of ALPP did increase and the excitement spurred me on to buy an additional 20 stocks for $4.59 (£3.34) each. Then they dipped to $3.97 (£2.89) and I bought another ten, telling myself they were “on sale”.
Over the coming weeks, the value of the stocks continued to fluctuate. Every time they fell, distraught investors would take to the Facebook groups, cursing those who’d promised huge wins by the end of the day. They’d often be ridiculed for not knowing what they were doing, by the same people who pressured them into buying the stocks in the first place.
I gradually sold all my penny stocks and made... £11.28 profit. Not exactly enough to retire on. I was disappointed that my dreams of getting rich quick hadn’t materialised, but relieved the rollercoaster ride was over.
One of the biggest challenges was learning to separate fellow amateur traders from the Facebook scammers looking to take advantage of rookies like me. Paul agrees: “It’s hard to tell whether people have hidden agendas or not.”
Some of these trading stars have been featured in the press for making thousands from their bedrooms. But dig a little deeper and you’ll sometimes find forums where people accuse them of making money from selling “signals” – advice on when to make certain trades – rather than from actually making trades.
Chartered financial planner Martin Bamford says: “Scams in the trading world don’t necessarily look like scams. One of the big ones we’ve seen are trading signals, where you pay a monthly membership to be part of a Whatsapp or a Discord group and people tell you which trades to make.
“They don’t have a clue whether those trades will profit or not. What they’re doing is illegal because they’re offering advice, but [they] aren’t regulated.”
Another common trading scam is known as a “pump and dump”, where fraudsters spread misleading information that encourages people to buy a particular stock. When its price increases to a certain level, those who initiated the scam will sell their shares, leaving other investors out-of-pocket. One VICE writer who fell for this trick turned a £100 investment into all of £8.
There are occasional voices of reason on these Facebook groups. Member Callum Holt wrote: “Following the advice on here is the equivalent of walking into a casino and putting all of your money on black or red.”
He told me: “I’ve quit looking at those groups. Very little to be gained out of reading them, normally [you] just feel pressure to buy into something because you’ve seen someone apparently make money on it.” Callum spent around £80 on penny stocks before deciding to avoid them in favour of more established companies.
While he describes the amount he’d spent as “nothing major”, he says he’s sympathetic to those who’ve lost more. “People should not be duped into thinking that investing is an easy get rich quick scheme,” he said.
I asked Martin Bamford what he’d say to anyone turning to penny stocks with dreams of quitting the nine-to-five. He said: “There are the people who give the perception of success on social media [...] but the ones who are genuinely successful have put the work in and have done it over a period of decades.”
While I came away from my penny stocks experience with slightly more money than I put in, the real gains came from the harsh reminder that being a good budgeter and saver doesn’t make me a sensible investor. I’m about as clueless as every other amateur.