If individuals derive a small utility from gambling, we should observe high turnover in stock portfolios that are of only marginal importance to them. By the use of detailed individual financial data, as weIl as trades from a Swedish online broker, we measure the frequency and cost of online trading in the cross-section and reject this hypothesis. Investors who have online portfolios that constitute a large share of risky assets are more likely to trade, trade more aggressively when they do trade, have lower trading performance, and less wealth. Trading losses are therefore mainly carried by those who can afford to carry them the least.
Previous studies of investor behavior have documented that trading is harmful to the portfolio return, but have been unable to measure how important this underperformance is for the individual. By the use of detailed individual financial data, as well as trades from a Swedish online broker, I measure the cost of online trading. It is found that the more important the portfolio is, measured as the fraction of the investor's portfolio of total financial assets, the higher is turnover. In addition, financially important portfolios have slightly lower trading performance. The overall result suggest that the cost of online trading can be substantial. The top quintile of investors who have the highest share of their total financial assets in stocks invested at the brokerage firm under study loose 3.34% of financial wealth annually, which corresponds to 1.87% of aggregate income within this group. These investors do not only have lower overall wealth and income, but also have the highest aggregate trading losses. Therefore, trading losses are mainly carried by those who can afford them the least. Across individuals, annual losses for 36% of investors exceed 1% of their financial wealth, and 17% lose more than 5%.
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