How stocks became the game that record numbers of Americans are playing

Retail investors have plenty of ways to play once-exotic and out-of-reach markets. Exchange-traded funds that invest in Bitcoin premiered this year, and a boom in zero-day options—a turbocharged version that allows traders to make rapid and risky bets on price moves—has taken the retail community by storm.

At the same time, sports betting has exploded, with Americans wagering more than $220 billion in the past five years, according to the American Gaming Association. A company called Masterworks LLC even lets regular folk buy fractional shares in artwork. “Trading has become interchangeable with the same kind of online betting that we’re seeing for games and in the sports world,” says Peter Atwater, an economics professor at William & Mary. “It’s part of a gambling zeitgeist.”

The bull market makes trading seem easy and fun, but it may well end badly for investors. When the S&P 500 fell 19% in 2022, retail traders collectively lost $350 billion, according to Vanda Research. The average retail portfolio was down 30%.

For the young, the risks are especially clear. Brains aren’t fully developed until people reach their mid-20s, and US Surgeon General Vivek Murthy recently posted an advisory about the effect of social media on children and adolescents, highlighting the risk of addiction. Online brokers share DNA with social media: Both are designed for interactivity and engagement. And their users overlap, with investors sharing tips on Reddit, X and TikTok.

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Clifton Green, an Emory University finance professor, says that if today’s retail traders lose too much money, they might give up on investing for good, missing out on long-term gains that could be more safely achieved through diversification and index-tracking funds.

Despite all the fanfare over options and single-stock trading, if you just bought an S&P 500 index fund five years ago, reinvesting dividends, you’d have doubled your money after earning an average annual return of 15%. Research shows that investors, both professional and amateur, are better off sticking with a diversified portfolio for the long term and that rapid trading tends to lead to painful losses.

Regulators are concerned that brokerages are gamifying trading in a way that lures people into betting more and more money. This year, Robinhood Markets Inc. agreed to pay a $7.5 million fine to settle Massachusetts Secretary of State Securities Division allegations that the company’s gamelike features took advantage of often young, inexperienced customers. (Robinhood, which said the claims didn’t reflect current practices, denied wrongdoing.)

One feature that the state faulted—and the company eliminated: digital confetti that rains down on the screen when users complete their first stock trade. The US Securities and Exchange Commission and the Consumer Financial Protection Bureau are looking at such practices, too. A recent report from the CFPB noted similarities between financial services and gaming.

Julius Johnson, a 33-year-old who works in retail in San Antonio and trades on the side, started investing in 2020 after he saw someone post on X about the money they made. He’s mostly interested in options on securities such as GameStop, DraftKings Inc. and the Invesco QQQ ETF, which tracks the Nasdaq-100 Index.

That first year, he lost $2,000 in two weeks and almost gave up his hobby. Johnson would trade on his phone during breaks at work, and sometimes he’d sneak into the bathroom or sit in his car to check his options bets. “It’s very addicting,” he says, “probably just the user interface and how easy it is to trade.” He eventually jumped back in after seeing the S&P 500 recover.

To understand the changes in stock trading, consider the process of buying equities a few decades ago. Say you heard your friends talking about a promising public company that was selling for $50 a share. You would’ve had to call your stockbroker and customarily would’ve asked to buy a round lot of 100 shares for $5,000. To put together a reasonably diversified portfolio of 20 companies that way, you’d need $100,000.

Then there were the fees, which could add up to hundreds of dollars. When the US Securities Acts Amendments of 1975 ended fixed trade commissions, some brokerages took that as an opportunity to increase their fees. Others did the opposite, creating the discount brokerage business. Charles Schwab began charging just $70 a trade, a steal at the time.

Thanks to better technology and competition, those fees kept decreasing, to a typical $13 a trade in 2005, then $5 by 2019, eventually giving way to the zero-fee era we’re living in now.

In the early 2000s, brokers started letting investors purchase just a slice of a stock, using as little as a dollar or even a cent. Although fractional shares were introduced in the 1990s, high trading fees meant that it usually didn’t make sense to invest such a small amount. The decline in costs has also made it easier for retail investors to buy and hold index funds.

Of course, nothing on Wall Street is truly free. Brokers today make money by sending their customers’ buy and sell orders to computerized trading firms such as Citadel Securities LLC and Virtu Financial Corp., who pay to get transactions sent their way. Although this system helps with market liquidity, the SEC has concerns that retail investors may end up getting worse prices for their shares—in effect, paying hidden commissions.

Still, what used to be a multiday process requiring phone calls and paperwork can now be done in seconds, without an upfront commission. “Back 10 years ago, if you wanted to set up investments, the fees would eat up half of what you were putting aside,” says Yelena Larkin, an associate professor of finance at York University in Toronto.

Larkin teaches an introductory finance course, a requirement for students at her university. Almost everyone in it has either a trading account or some knowledge of the stock market, she says. Trading fees aren’t even on their radar; they’ve grown up investing in a world without them.

Even a decade ago, self-directed trading would need to take place on either a desktop or laptop computer. Now, after posting on X or Instagram, or watching TikTok videos, you can place a few trades on your brokerage account at Robinhood, Interactive Brokers, ETrade or Coinbase.

“You have to offer your clients access to mobile,” says Joe Mazzola, Schwab’s head trading and derivatives strategist. “When we look at activity on mobile versus on platform, the growth is exponential—mobile is a game changer.”

Ben Allen, a 49-year-old who works in the music business in Atlanta, has been trading stocks on the side for 15 years and has watched fees shrink to nothing. He opened a Robinhood account a few years ago, mostly because he didn’t want to have to call his broker to make a trade.

Although Allen has a portfolio of retirement funds managed by a professional, he likes to play around with a few thousand dollars invested in companies such as Apple Inc. and Nvidia Corp. “The world of brokerages used to be opaque,” he says. “But now everyone understands, and it’s like the cat’s out of the bag.”