Trading and the Gender Divide: Myth or Reality?

To become a top-tier trader, you need to prove to yourself, beyond a doubt, that you can dominate the markets—regardless of your natural traits. When it comes to gender, men and women often approach investing differently. But does that mean one gender has the upper hand in the trading world?

There are certain things about yourself you can't change—like your age, gender, or the level of support from your partner. And let's not forget your personality—it’s not something you can just trade out. Sometimes, these fixed traits can make you question whether you have what it takes to succeed. But are they really holding you back? Let’s dig into the facts and find out.

Only 26% of American women get involved with investing in the stockmarket, and they tend to invest less aggressively than men. However, many studies support the principle that women actually outperform their male counterparts. Yet, despite these facts, according to a survey by Fidelity in 2017, only 9% of women think they make better investors than men. 

With this in mind, it’s a concern that so many women doubt their own money management capabilities in the financial markets. 

These worries about money extend beyond just the stock market as well. According to a study conducted in March 2019 across 11 countries, Jodie Gunzberg from SPGlobal discovered some pretty interesting stuff. It turns out that in both the US and Canada, fewer women feel like they're in "excellent" or "good" financial shape compared to men. And here's another eye-opener: if they were hit with a financial setback, like losing their job, 22 percent of American women say they wouldn't be able to afford their current lifestyle right away. That's almost double the percentage of American men (13%).

Gunzberg has a theory on this. She thinks it might be a major reason why only 26 percent of American women actually invest in the stock market, even though 41 percent of them have a positive view of it. It's like a Catch-22 situation for women—they see the potential for financial gain in the market, but they often don't have the same level of financial security to take the risks that come with investing.

The Testosterone Effect

The way our brains are wired plays a big role in our trading performance, and there are distinct differences between male and female brains. From birth, these physiological differences become apparent. Understanding how they impact trading can give you insight into how they might help or hinder your abilities.

Let’s focus on hormones, especially testosterone. Professor James Dabbs from Georgia State University studied testosterone levels in men across different careers. He found that those at the top of their game had higher testosterone levels than those who didn’t achieve as much. Even the rush of success boosted testosterone production. However, elevated levels of this hormone have been linked to aggression.

So, it’s likely that top male traders have higher testosterone levels, but the study highlights the importance of managing this hormone to keep it from negatively affecting decision-making. Balancing testosterone’s effects could be key to sustaining long-term success in the markets.

Just because males tend to have greater testosterone levels doesn’t actually mean they’re better traders. Multiple studies suggest that women generate a superior return on their investments. 

When men's brains are at rest, approximately 70% of their activity shuts down, indicating their ability to mentally set aside problems and take a break. Continuous brain stimulation can be discomforting for men. To achieve peak effectiveness, it's important for men to allocate time for down-regulation. Taking breaks from trading allows their brains to relax and recharge. By employing this approach, men can trade more effectively instead of subjecting themselves to constant market stimulation.

On the other hand, even in a relaxed state, a woman's brain continues to function at about 90% of its usual activity level. This suggests that women are more inclined to process information continuously. Research indicates that women often struggle to set aside their problems and frequently benefit from discussing situations with others to find solutions. Female traders may have a greater need to share their wins and losses with a friend or confidant. By acknowledging these needs, traders of all genders can navigate the trading journey more smoothly.

Confidence in Decisions

The way each gender perceives and acts on their confidence in trading decisions differs. Through an analysis of account data from a large US discount brokerage firm, Brad Barber and Terrance Odean examined the stock investments of men and women. They found that men traded 45% more frequently but earned 1.4% less per year compared to women. These differences were more pronounced among single individuals, with single men trading 67% more and earning 2.3% less per year. The researchers attribute these results mainly to the detrimental effects of overconfidence and excessive trading.

Fidelity Investments, in a study involving a demographically representative sample of 2,995 adults in the US, has also replicated the finding that women outperform men. According to Fidelity client data, women, on average, outperformed men by 40 basis points, or 0.4%. This difference may seem small, but it has a significant impact over time.

"The good news is many women are putting themselves in the financial driver's seat, taking positive steps to save and invest effectively for their future," said Kathleen Murphy, president of personal investing at Fidelity. "But there are still many who need to do more. The reality is that saving alone is not enough to even keep pace with inflation, so if you're not investing, you're likely losing money. Taking the next step to ensure that savings are invested properly and generating growth is critical to helping women progress toward their financial goals and live the lives they deserve."

Portfolio Turnover

According to the studies conducted by Barber and Odean, there is a clear correlation between portfolio turnover and ultimate performance. When a portfolio has a turnover rate exceeding 200% per year, the average annual net return lags behind the market index by 10.3%. In a study involving 78,000 households, it was observed that women had an annual portfolio turnover of approximately 53%, while men had a turnover of 77%.

The research suggests that women exhibit confidence in their abilities when provided with unambiguous and immediate feedback. However, in situations where feedback is absent or ambiguous, women tend to have lower opinions of their abilities and often underestimate their trading performance compared to men.

Considering that feedback in the stock market is often ambiguous, women may be more inclined to wait for optimal opportunities before making investments. This cautious approach could explain their relatively lower trading levels compared to men, while still achieving higher levels of success.

Fund Management Performance

There is compelling evidence to suggest that there are differences between females and males in terms of their risk appetite and asset management strategies, particularly during downturns. However, the encouraging news is that numerous studies consistently demonstrate that businesses controlled by women tend to outperform those controlled by men.

This trend of females outperforming their male counterparts extends even to the hedge fund industry. According to Hedge Fund Research (HFR), during the first two months of 2017, hedge funds owned or managed by women delivered a remarkable return of 3.65%. In comparison, the overall hedge fund industry achieved a return of 2.23% over the same period.

Moreover, when examining the performance of investment portfolios during the market drawdown in 2022, assets managed by women exhibited stronger performance than those managed by their male counterparts. This analysis considered returns from 80 investment portfolios across 73 asset managers.

These findings highlight the notable success of female-controlled businesses and female-managed investments, underscoring the significant contributions and abilities of women in the financial industry.

Interestingly, the evidence also suggests that in times of stress, female fund managers take less risk than male fund managers, but they achieve the same performance. So yes, females tend to play it safe during periods of negative market sentiment, but this pays off as their risk-adjusted performance is the same.  

Authors Gehde-Trapp and Klingler found that the male managers took on “significantly more” total fund risk when sentiment was bad. This risk appetite did not derive commensurate positive rewards. “We find no significant relation between the higher risk due to bad sentiment and performance. Hence, fund investors do not receive a compensation for the higher risk that (male) managers take on,” the authors wrote. 

What does all this mean?

Ladies, it's crucial to recognise that the data strongly supports your potential for trading success. As a woman, you have every reason to believe in your ability to thrive in the trading arena. Despite the perception that trading is predominantly a male-dominated domain, numerous studies consistently demonstrate that women outperform their male counterparts in various aspects. In fact, females tend to excel in almost every measure of effectiveness, including actual performance, risk evaluation, and portfolio management.

Even if you occasionally experience self-doubt, don't let your gender become a barrier to exploring trading as a profession or a source of income. Engaging in financial markets can provide an opportunity for you to leverage your calmness, humility, and meticulous preparation before entering new positions.

Seek support from fellow traders and find trusted individuals with whom you can discuss your trading decisions and seek valuable insights. Additionally, remember to prioritise downtime and self-care to ensure you can effectively manage the cognitive demands of investing. Regardless of your gender, trading requires a high-performance mindset, and acknowledging the need for recovery is essential.