In key financial events, both liquidity and volatility tend to pick up – and when it comes to political votes it is no different. According to data from investment platform Selftrade, trading increased 171% the day after the Brexit referendum compared to polling day. This shouldn’t be too surprising, as the market was broadsided in what was one of the biggest shocks of the decade – and nothing sends trading volumes soaring like a violent mismatch of expectation and reality.
Selftrade also found that the day after the 2017 general election, private investors on the platform increased their trading activity by 26%. In this election, Theresa May lost her majority, when she had been widely expected to win at the start, with Corbyn making strides into her lead.
How private investors traded after the 2017 general election
In the day after the general election, selling activity was up 63% against the polling day, which means there were many people completely not prepared for the result of the election. If they had been, they wouldn’t have been selling!
We also know that not many people were feeling like they could take advantage of the market conditions, because there was only a 3% increase in buying activity. The market is supposed to be efficient, but with private investors this is very much not the case. Whereas hedge funds and trading firms have whole teams of analysts and quantitative researchers to crunch and compute the numbers, the private investor mainly acts on feeling.
Emotions can sometimes be helpful – being fearful means we end up taking on less risk, but very often emotions can be damaging. Greed and fear are both well known for causing many an investor’s downfall.
How private investors traded after Brexit
Brexit was the biggest surprise of all and private investors were keen to mop up stock, with buying activity up 360%. Selling activity was also up 22% – but this may just be a result of more trading. Every buyer wants to sell at some point. As markets plunged due to fear, private investors scooped up the Brexit bargains.
How to trade the 2019 general election
Regardless of your political opinion, there’s no doubt that a Tory majority is the best for the markets. Corbyn’s plans to nationalise corporations would cause shockwaves across the markets if he were to get in – with Corbyn announcing extra fees on share dealing that would affect many of our lifestyles.
But what is priced in? That is the million-dollar question.
If everyone is expecting a Conservative majority – who is left to buy when it happens? What’s the upside? And the downside? A Labour majority would see opening auctions way below closing prices, market makers gapping stocks down, and a fearful sell-off.
Nobody thinks it can happen. But nobody thought that about the Brexit vote. Nobody thought that Trump could win. And that’s exactly why Labour can.
Whatever your political intentions are, just make sure your portfolio is protected. Cover your downside, because that’s all we can do in this business.
How to take advantage
Desperate people sell cheap. But if you’re prepared, then you know what to buy.
Look at what stocks will benefit if a Labour majority comes in – and do the same for both a Conservative majority and a hung parliament!
Most people won’t do this. But that’s why you’ll have an edge.
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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.