Are kids better investors?
Children with brokerage accounts appear to have an uncanny knack for making good trades ahead of earnings and takeover announcements, a study finds.
Kids with underaged investor accounts get it right a lot of the time. How could this be? Should we all be betting on Disney (DIS) and Mattel (MAT)? Is there some secret kindergarten course on cash flow and call options?
The answer may be a little more sinister than you think.
The team of researchers studied the transactions of more than 500,000 people from 1995 through 2010. They studied investors trading on the Nasdaq OMX Helsinki exchange, combing through data from Euroclear, a company that settles securities transactions in Europe. Their findings will appear in an upcoming issue of The Journal of Finance. Children under 18 in Finland can trade stocks on accounts opened by their parents or other guardians.
According to the study, underaged account holders were extremely successful at picking stocks, especially right before major swings in stock prices, big earnings news and takeover announcements. Here's what they found:
- One day before major earnings announcements, young shareholders traded in the correct direction 57% of the time.
- One day ahead of large price changes, youngsters traded in the correct direction 58% of the time.
- The day before takeover announcements, young traders made the correct trades 72% of the time.
The researchers also think that the guardians that set their children up with brokerage accounts are likely fairly wealthy and pretty good at stockpicking themselves.
The tendency for any parent setting up a brokerage account for their children is to avoid risks. You want your kids to go the safe route -- even in investing -- and you seek out stability. Often that means blue chips, stocks with decent dividends, and stocks with a good future.
Even without an insider trading advantage, I bet that underage brokerage accounts have done pretty well because they tend toward safe, less flashy picks with good fundamentals.
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