Either children are much better stock pickers than adults, or their parents are using their accounts to hide insider trading, an extensive review of trading data by a team of international researchers suggests.
In an academic study soon to be published in the Journal of Finance that looked at 15 years of trading data, a trio of professors found that the online stock trading accounts that have been created on behalf of kids are more likely to have bet the right way on a stock than regular investors.
The research, which was conducted by Henk Berkman at the University of Auckland Business School, Paul Koch from the University of Kansas School of Business and Joakim Westerholm at the University of Sydney Business School, looked at stock trades on the Nasdaq OMX Helsinki Exchange.
The research team chose that relatively obscure stock exchange to study because Finland has open data laws and discloses the known ages of account holders.
The trio looked at 671,438 different trading accounts that made stock trades between January 1, 1995, through May 31, 2010.
They looked at what investors in different age groups bought or sold in the days before what turned out to be major corporate news about those shares — earnings surprises, takeovers, scandals and similar market moving events.
All else being equal, for any given stock trade one would statistically expect there to be an equal 50/50 balance of winners and losers.
But the researchers uncovered an alarming trend — 72% of the time, a trading account for somebody under the age of 10 ended up being right, far better than the average among all investors.
The research team doesn't believe that the results came down to luck, or evidence that toddlers make better stock pickers.
Rather, they think it's far more likely that it's the result of the child's guardian using illicit methods such as insider trading to juice returns. Or more likely, hiding their own ill-begotten gains in their children's trading accounts so as not to attract suspicion.
In the current climate of a regulatory crackdown on anyone trying to flout investment rules for personal gain, the study says getting regulators to scrutinize the accounts of the children of sophisticated investors might yield some interesting leads.
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