A new wave of investors suffered big losses in recent days, getting a harsh lesson on how the stock market works.
Technology stocks plunged over a three-day trading span that ended Tuesday by their widest margin in nearly six months, erasing thousands of dollars from some individual investors’ portfolios.
Some new investors used options to place big bets that tech stocks would continue to rise unimpeded and were wiped out. Others who had just got into those stocks over the past few months saw their recent gains eliminated. Meanwhile, investors who jumped into the market in March and played it safe saw mere haircuts to their portfolios.
The painful stretch of trading has been a wake-up call for some of the stock market’s newest participants that stocks don’t just go up. They also go down, and sometimes, without any clear reason.
“The market has been an emotional roller coaster,” said Temitayo Ola, who is 31 years old and lives in Los Angeles. Mr. Ola got deep into trading stocks back in March.
“As someone new to the stock market, I didn’t realize it could hit periods where you have a pullback like this,” he said.
Wall Street analysts and money managers said the pullback seemed unprompted by anything other than that stocks had run up over a short period. Although the losses pushed the tech-heavy Nasdaq Composite (.IXIC) on Tuesday into a correction—a decline of 10% or more from a recent high—such an occurrence is considered healthy for the market, especially when many tech stocks remain up by double-digit percentages for the year.
Investors who bought some of the biggest tech stocks in March are still sitting on healthy gains that have swelled investment portfolios. Including the recent losses, shares of Apple Inc. (AAPL) are up nearly 60% over the past six months. The stock of Facebook Inc. (FB) is 50% higher, while shares of Microsoft Corp. (MSFT) have advanced almost 30%. And the stock of Tesla Inc. (TSLA) has almost tripled during that span.
Mr. Ola isn’t alone. Millions of investors have jumped into stock trading this year, using apps on their smartphones to swap shares like never before. Investors have opened new accounts at record-setting levels this year, using newer trading apps such as the one from Robinhood Markets Inc., as well as diving into more-traditional brokerages including Charles Schwab Corp. (SCHW) and TD Ameritrade Holding Corp. (AMTD).
Trading volume has been surging as customers buy and sell stocks at a frenzied pace, with some brokerages reporting a pickup in activity that coincided with the stock market’s biggest slump in months.
Trading activity last week within the brokerage of Vanguard Group was higher than usual, said Charles Kurtz, a spokesman for the firm. Merrill Edge, the self-directed brokerage of Bank of America Corp. (BAC), has seen trading activity almost triple since March compared with last year, with its total number of accounts nearing three million, said Matthew Card, a Bank of America spokesman.
Mr. Card added that clients had accessed the bank’s investing-education content at a rate 25 times higher than in 2019, indicating that many are still learning the ropes.
The rush of individual investors contributed to the stock market’s big rebound from earlier this year. The S&P 500 index (.SPX) has jumped almost 50% from its March trough. But the rally gave some of the market’s newest entrants the impression that stocks largely move in just one direction—a mistake that proved costly.
“Prior to last week, I was up a lot,” said Mr. Ola, a video producer who said he had doubled his money since getting into the market in March.
Mr. Ola said he lost $10,000 alone on call options—basically wagers that profit if stock prices go up—for DocuSign Inc. (DOCU) and Rocket Cos. (RKT). He has another contract remaining on Apple that will likely be a loss as well.
Options trading has been especially robust as investors try to magnify their gains by placing bets on whether stock prices will rise or fall. Daily average options trading activity hit a record 28 million contracts last month, up sharply from the year before.
“People jump into options trading to make more money, but I took a major L,” Mr. Ola said, referring to his losses.
At the same time, most of his stock portfolio, which consists of tech stocks including Apple, Tesla and Microsoft, fell sharply. Each of those stocks on Tuesday gave up a chunk of their recent gains—none more so than Tesla, which suffered its steepest decline on record.
“If you’ve only experienced this rip-roaring market rise since the lows of March, you come to think of investing as very easy, and it’s not,” said Steve Sosnick, chief strategist at Interactive Brokers.
Megacap tech names had proven popular with investors trading both stocks and options, Mr. Sosnick said.
“I think there had to be a lot of people who were just a little taken aback by how tenuous a lot of your investment gains can be,” he said.
Mr. Sosnick said demand for call options for Apple and Tesla had recently outweighed bearish put options, indicating that investors were more worried about missing out on gains than they were about hedging against losses.
Some investors said they weren’t fazed by the pullback and saw it as an opportunity to buy stocks they missed out on earlier in the year. Tyler Snyder, a 21-year-old HVAC service technician in Kitchener, Ontario, took some of his losses in stride and bought shares of International Business Machines Corp. (IBM) last Friday after the company’s stock slid nearly 5% over two trading days.
“I feel like a kid in a candy store,” Mr. Snyder said. “The market is what you make of it. A lot of scared money is being shaken out right now.”
Still, the timing couldn’t have been worse for some investors.
Farhoud Moaddel, who is 50 years old and lives in London, watched Tesla shares rocket higher throughout the summer before getting in on the action. He said his fiancée had made good money flipping shares. Stock in the company seemed unstoppable as it more than quadrupled in value since December.
“I just went in, and the music stopped,” Mr. Moaddel said. Their Tesla shares have shed as much as $20,000 in value since they bought them, he said.
Mr. Moaddel, who is self-employed, sees parallels with another unfortunate investment decision he made: He sold 400 shares of Amazon.com Inc. (AMZN) at a loss during the 2008 financial crisis. Mr. Moaddel is now of two minds about whether to hold on to the Tesla shares or cut his losses.
“I don’t know if it’s going to slide further,” he said. “I’ll have to see what happens, but it’s going to be very painful.”
As well as investing in Tesla, Mr. Moaddel bought shares in a few other tech companies at about the same time. Those shares have also fallen—and the timing is far from ideal for the couple.
“We were planning to get married, and we could do with every pound,” he said.
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