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Boom in individual investing fuels low-cost stock trading




On a Thursday in August, more than 10% of all US stock trading volume was in Gevo shares Inc.,

a little-known renewable fuels company.

The stock fell from 55 cents to $ 1.82 that day after the company announced a big deal, triggering an increase in volume. Much of the deal, according to Rosenblatt Securities, took place in over-the-counter venues where retail brokers routed orders, a sign that hordes of individual investors were trading the shares.

It really surprised us, said Patrick Gruber, Managing Director of Gevo.

Trading in low-priced speculative stocks has surged this year, fueled by a massive influx of individuals using commission-free investing apps and online brokers. For several months this spring and summer, more than 25% of stocks traded on the U.S. stock market were companies with a share price below $ 5, according to data from the New York Stock Exchange.

From 2012 to 2019, that percentage was mostly between 10% and 15%, according to NYSE data. In September, it fell to 17.1%, still high by historical standards.

Patrick Gruber, left, is Managing Director of Gevo. Shares of the renewable fuels company saw a huge increase in trade volume on August 20.


David Pollard / Gevo

Companies often try to avoid having a share price below $ 5 because of the perception that these stocks are risky, even though, legally speaking, this term only applies to stocks that are not. not listed on the stock exchange. Asset managers, like mutual funds, often avoid stocks below $ 5.

This is why individuals play a disproportionate role in low-cost stocks. Individual investors fueled unusual rallies this year in stocks like Eastman Kodak Co.

and bankrupt car rental company Hertz Global Holdings Inc.

Certainly, some of the activity in stocks under $ 5 was caused by the coronavirus massive sell-off in February and March. This temporarily sent large stocks like Ford Motor Co.

and Sirius XM Holdings Inc.

below the $ 5 mark.

But many of the most actively traded stocks this year have been small companies like Gevo, with a market value of less than $ 150 million, which are garnering intense attention on penny stock Twitter accounts and Reddit forums.

Gevo was widely quoted in tweets on August 20 after announcing a deal with the US arm of commodity trading giant Trafigura Group Pte. Ltd. and its stocks have skyrocketed. The stock has since dropped some gains. It closed Thursday at $ 1.21.

A rail line serves the Gevo renewable fuel production facility in Luverne, Minn.


David Pollard / Gevo

Individual trading activity began to skyrocket at the end of 2019, after the brokerage industry turned to free stock trading, and it has accelerated this year after the coronavirus forced millions of dollars. Americans to stay at home with little to do.

Retail activity has accounted for nearly 20% of trading volume this year, nearly double the 2010 level, according to Bloomberg Intelligence. JMP Securities estimates that around 10 million new online brokerage accounts were created in 2020, about half of them at Robinhood Markets Inc., whose app is popular with young investors.

As millions of new traders sign up for the Robinhood investment app, the company faces serious scrutiny for allowing some inexperienced users to make risky bets. WSJ spoke with a financial education professional and two Robinhood traders about how the app is changing the brokerage industry.

Commission-free trading has fueled a boom in low-cost stocks as it attracts less wealthy investors to the market, said Anthony Denier, CEO of Webull Financial LLC, which offers a trading app with around 750,000 active daily users.

If you have a $ 500 account, you cannot buy any of these highflying S&P 500 names. But you can go in and speculate on some of those cheaper names, Mr Denier said.

Webull says that about 56% of the U.S. stock trades he handled this year were stocks valued at $ 5 or less.

Most brokerages do not say how many of their investors are holding stocks at low prices. But data from Atom Finance, a fintech company that provides consumers with research on investments, suggests these stocks are particularly popular at Robinhood.

In August, 57% of Robinhood accounts held shares priced below $ 5, compared to 14% at Charles Schwab Corp.

and 16% at Fidelity Investments, according to Atom Finance. Atom collects this data by logging into the brokerage accounts of its more than 100,000 clients.

A person close to Robinhood said Atoms’ estimate was flawed because Robinhood offers users free shares when they refer new customers to the company. Not counting those promotional giveaways, about 30% of Robinhood accounts hold stocks under $ 5, the person said.

Robinhood says stock trading under $ 5 on its app has declined in recent months as it rolled out split trading, which allows investors to own slices of stocks that can cost hundreds or thousands of dollars. for an action.

Matthew Bradley opened a Robinhood account in May and has become an avid cheap stock trader. A 37-year-old father of two who lives in Lancaster, Ohio and works in IT, he often gets up at 5 a.m., makes coffee and searches for business ideas online.


Why do you think cheap stocks are so popular right now? Join the conversation below.

It’s a great feeling to find something obscure and make some gains, he said. Last week a friend mentioned such a stock: Pioneer Power Solutions Inc.,

a small manufacturer of electrical equipment based in New Jersey. Mr. Bradley bought it for $ 4.80 a share and sold it the next day for $ 6.51, making a small profit.

He was not alone. Pioneer’s daily trading volume was nearly 294 million shares on October 6, the day it made its purchase, according to Rosenblatt Securities. This made it the most traded security in the entire US market, accounting for 2.8% of the total volume.

Pioneer shares more than quadrupled to $ 6.89 in the three days ending October 7. They have since lost more than half of their value, closing at $ 3.25 on Thursday. There was no clear driver for last week’s rally, but there was a storm of attention from social media. Analysis by Meltwater, a global media intelligence firm, shows that hundreds of tweets mentioned the Pioneers ticker, PPSI, on the morning of October 6.

Pioneer did not respond to requests for comment.

Write to Alexander Osipovich at [email protected]

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