Individual investor trading results in systematic and economically large losses. Using a complete trading history of all investors in Taiwan, we document that the aggregate portfolio of individuals suffers an annual performance penalty of 3.8 percentage points. Individual investor losses are equivalent to 2.2 % of Taiwan’s gross domestic product or 2.8% of the total personal income. Virtually all individual trading losses can be traced to their aggressive orders. In contrast, institutions enjoy an annual performance boost of 1.5 percentage points, and both the aggressive and passive trades of institutions are profitable. Foreign institutions garner nearly half of institutional profits. (JEL G11, G14, G15, H31) Financial advisers recommend that individual investors refrain from frequent trading. Investors should buy and hold diversified portfolios, such as low-cost mutual funds. If skill contributes to investment returns, individual investors are obviously at a disadvantage when trading against professionals. What is less clear is just how much do individual investors lose by trading? In this paper, we document that trading in financial markets leads to economically large losses for individual investors and virtually all of the losses of individual investors

dedicated research assistance. We are grateful for comments from Simon Gervais, Joel Hasbrouck, and

We ask whether the typical investor and the aggregate investor exhibit a bias known as the disposition effect, the tendency to sell investments that are held for a profit at a faster rate than investments held for a loss. We analyse all trading activity on the Taiwan Stock Exchange (TSE) for the five years ending in 1999. Using a dataset that contains all trades (over one billion) and the identity of every trader (nearly four million), we find that in aggregate, investors in Taiwan are about twice as likely to sell a stock if they are holding that stock for a gain rather than a loss. Eighty-four percent of all Taiwanese investors sell winners at a faster rate than losers. Individuals, corporations, and dealers are reluctant to realise losses, while mutual funds and foreigners, who together account for less than 5 % of all trades (by value), are not.

This paper presents a multi-asset model of stock returns in a market where some investors place inelastic orders that are uncorrelated with fundamentals. Risk-averse rational arbitrageurs accommodate trading imbalances but require compensation. The compensation manifests itself as predictable return reversals. Our model predicts that whenever underlying fundamentals are correlated, trading imbalances also create cross-stock (temporary) price pressure. We test implications of the model and show pervasive price pressure at daily, weekly, and monthly frequencies. A zero-cost portfolio based on sorting trading imbalances into deciles earns a riskadjusted average return of 79 bp per week. Contemporaneous cross-stock trading imbalances have a price impact that is four times larger for same-industry versus different-industry pairs of stocks. We end by linking limited risk bearing capacity in the market to approximately 54 % of the observed co-movement in stock returns.

We study the trading of individual investors using transaction data and identifying buyeror seller-initiated trades. We document four results: (1) Small trade order imbalance correlates well with order imbalance based on trades from retail brokers. (2) Individual investors herd. (3) When measured annually, small trade order imbalance forecasts future returns; stocks heavily bought underperform stocks heavily sold by 4.4 percentage points the following year. (4) Over a weekly horizon small trade order imbalance reliably predicts returns, but in the opposite direction; stocks heavily bought one week earn strong returns the subsequent week, while stocks heavily sold earn poor returns.

Turnover, account value and diversification of real traders:

This paper examines the profitability and risk-taking behavior of individual traders in the Taiwan Futures Exchange (TAIFEX) by tracking their trade-by-trade transaction histories. We first show that although as a group individual traders have a net loss after all transaction costs, there are fairly profitable traders, accounting for about 1/3 of the traders. Further examination reveals that profitability varies systematically with trading frequency and volume. Focusing on the frequent and high-volume traders and following their trades as they steadily accumulate and offset contract positions, we analyze their risk-taking behavior by examining their responses after reaching some threshold levels of losses and gains. We then investigate whether they vary in their responses and link the variations to their profitability. We show that in aggregate they tend to offset their trades after reaching some threshold levels of losses and gains. However, the tendency to offset positions varies among them in a systematic fashion, which in turn affects their profitability differently depending on whether they are profitable or not. Among profitable traders, those who have a greater tendency to offset their trades in the face of threshold losses and gains are less profitable. On the other hand, among unprofitable traders, those who tend to offset their positions when faced with the threshold losses and gains suffer smaller losses. In contrast to the evidence from previous studies that examine the aggregate trader, the results from this study shed new light that challenges the general conclusions on the profitability and overconfidence in the literature. The results also have practical implications for traders in view of the linkage between profitability and risk-taking trading strategies. 1 I.

How well do financial experts perform? A review of empirical research on performance of analysts, day-traders, forecasters, fund managers, investors, and stockbrokers 1