Millions of retail investors have opened brokerage accounts over the past year, and many have taken to trading throughout the day to pass the time, have fun, and earn a little extra cash.
So, did all of these deals actually help the average retail investor’s portfolio during the COVID-19 dominated months of 2020?
Night is the right time.
To find out, we looked at the 100 most popular stocks traded by retail investors over the past year, compiled by Robinhood.
We looked at how an investor would behave if they bought every stock when the market opened each day and sold it a few hours later when the market closed. This is what we called the diurnal return. We then compared this to the overnight return, or what an investor would generate if they bought the stock at the close, held it overnight, and then sold it at the market open.
It turns out that investors who traded those 100 stocks throughout the day lost an average of 0.183% returns per day. If we assume 21 trading days in a month, this equates to losses of 3.84% per month in daily returns.
But if investors took the risk of holding those same stocks overnight, they averaged 0.195% in returns each night, or 4.10% per month in overnight returns. And if the investor held the stock over the weekend, they would earn an average of 0.271% per weekend, or 1.08% per month in return, assuming four weekends per month.
Average Returns: 100 Most Traded Stocks
|Return the weekend
December 31, 2020
What immediately stands out when we compare the current era of COVID-19 to the 10 years before it is that daytime returns were much lower during the pandemic. From 2010 to 2019, the average daily return for the 100 most popular stocks was 0.004% per day, down from -0.183% amid COVID-19.
Nightly returns also showed a particular trend. From 2010 to 2019, they averaged 0.042% per night. During the pandemic, they climbed to 0.195% per night between February 14 and December 31, 2020.
In fact, since February, when so many new investors joined the day trading game, 95% of these top-traded stocks have had higher overnight returns than during the day.
The day-night-weekend performance of Tesla stocks illustrates these broader patterns. Investors who bought Tesla at the open each market day and then sold it at the close on average one loss 0.12% per day. If they held the stock overnight, however, they would earn an average of 0.83% overnight. And if they held it over the weekend, they averaged 1.49% returns per weekend!
There are two potential explanations for these results: either retail investors prefer to sell their stocks short during the day and thus exert downward pressure during normal trading hours, or there is a lack of liquidity at night and on weekends, so investors can earn a premium for holding their shares during those hours.
Whatever the explanation, one thing is clear: the entire day of trading for the new Robinhood retail investor class was unprofitable for long-only investors.
The question is whether this trend will continue until 2021.
If you liked this article, don’t forget to subscribe to the Enterprising investor.
All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
Photo credit: ©Getty Images / J2R
Professional Learning for CFA Institute Members
CFA Institute members are empowered to self-determine and report professional learning (PL) credits earned, including content on Enterprising investor. Members can easily register credits using their online truck tracker.