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Is Online Trading Gambling with Peanuts?

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Author Info
Anderson, Anders () (Sonderforschungsbereich 504)
Abstract

Previous studies of investor behavior have documented that trading is harmful to the portfolio return, but have been unable to measure how important this underperformance is for the individual. By the use of detailed individual financial data, as well as trades from a Swedish online broker, I measure the cost of online trading. It is found that the more important the portfolio is, measured as the fraction of the investor's portfolio of total financial assets, the higher is turnover. In addition, financially important portfolios have slightly lower trading performance. The overall result suggest that the cost of online trading can be substantial. The top quintile of investors who have the highest share of their total financial assets in stocks invested at the brokerage firm under study loose 3.34% of financial wealth annually, which corresponds to 1.87% of aggregate income within this group. These investors do not only have lower overall wealth and income, but also have the highest aggregate trading losses. Therefore, trading losses are mainly carried by those who can afford them the least. Across individuals, annual losses for 36% of investors exceed 1% of their financial wealth, and 17% lose more than 5%.

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Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 06-02.

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Length: 32 pages
Date of creation: 27 Sep 2005
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Handle: RePEc:xrs:sfbmaa:06-02

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