The expanding involvement of individual investors in equities markets has been highlighted by recent occurrences. These investors employ leverage, purchase and sell options to speculate on particular firms, and depend on social media platforms to coordinate their portfolio plans, in addition to fueling an increase in trade volumes. The footprint of retail traders is documented in this box, which also analyses their influence on market functioning.
Millions of Americans now have smartphone applications that make trading stocks as simple as sharing material on social media. Six million Americans downloaded a trading app in January 2021 alone, and retail brokerages reported record-high average daily volumes for stock and options transactions. This increase comes on top of the over 10 million Americans who registered a new brokerage account in 20203, dubbed “the year of the retail investor” by some. Retail investors in the United States contributed almost the same amount of equities trading volume as mutual funds and hedge funds combined in early 2021.
The flood of individual investors has given the venture capital market a new lease of life, since it weakens institutional investors’ long-held influence. Retail investors get direct access to the venture’s unadulterated information since there are no middlemen. This eliminates the current market’s culture of knowledge disparity.
Why is stock investment becoming more popular?
There are probably various reasons why so many new people are getting into stock investment. The pandemic was undoubtedly a factor in the surge of interest. Millions of people found themselves with additional wealth and more leisure on their hands all of a sudden. Between October and December 2021, one out of every five Americans invested in equities or mutual funds, up 25% from the three months ended June 30, 2021.
Furthermore, a sizable percentage of online trading platform users say they want to continue investing any extra stimulus funds in equities.
The proliferation of simple-to-use investment applications, which are gradually being incorporated into payment apps, making money transfers even more frictionless, drove the unanticipated retail investing craze. In the meanwhile, gamification of investing on brokerage platforms and the expanding use of creative advertising strategies that stimulate frequent trading are both helping to popularize digital investment services.
These tendencies have been building for some time, but their influence has only just been obvious. Retail investors seem to have reached a tipping point, where they are more powerful than ever before thanks to real-time data and more sophisticated financial tools.
This new form of empowerment may increasingly come from the meeting of like-minded individuals in community hubs, where defying conventional knowledge and the willingness to go against standard trading strategies is not just encouraged, but rewarded. These social dynamics have had far-reaching consequences, such as the capacity to boost market liquidity.
Lowering barriers for retailers
Blockchain technology and cryptocurrency will play a critical role in realizing the retail investor revolution. It is critical that they democratize the venture capital sector and eliminate entrance restrictions.
Asset tokenization is another important enabler for retail venture capitalists, since it allows for fractional ownership, which reduces risk and expands the scope. Instead of imposing the necessity of bulk investments and significant capital needs, pooling allows merchants to contribute a portion of the total finance.
Investors with newfound power
For the time being, the new class of individual investors seems to be a separate breed, with goals and actions that position them on the other end of the spectrum from conventional, advice-seeking clients. This new group of investors may be divided into two categories.
1. Younger, first-time investors with low discretionary money make up the first group. They aren’t as informed as experts and may be swayed by different sources of information, including social media.
2. The second group consists of savvier, more experienced investors who have more money to invest. Individuals with these accounts may have accounts with conventional wealth management organizations or other internet brokers.
Some people like sharing their financial ideas and insights on social media, particularly with newcomers who might benefit from their combined knowledge. However, their advice may be ineffective and improper.
Role of Social Media in influencing retail investment
Social media tends to play a critical role in how both kinds of investors acquire and digest information, as well as how they make investment choices. Social media postings and discussion may be aiding in the collective knowledge of investors and offering a venue for people to exchange and fine-tune their investment strategies.
Many of these investor’s pride themselves on rejecting conventional thinking, yet the places they attend may be full with disinformation, self-serving counsel, and incorrect suggestions. Investors that are sensitive to extraneous pressures and do not do their own due diligence may suffer significant losses as a result of these transactions.
As a consequence, it is not uncommon to see these investors engage in perplexing and unusual trading behavior. They do, however, choose equities that are associated with well-known brand names. Other outlets, such as television ads, might influence their judgments in addition to social media.
Despite dramatic market shocks, their overall portfolios seem to include an element of “crowd wisdom.” Additionally, newly empowered investors often use sophisticated instruments to conduct increasingly complicated tactics like option trading.
Further research suggests that an increasing number of newly empowered investors are becoming more aware of market intricacies and the interdependence of diverse participants in the financial services ecosystem. For example, some retail investors have shown their ability to spot market inefficiencies.
The ecosystem provides retail investors with tiers of investment possibilities with increasing degrees of risk. As a result, retailers may engage in VC markets in a variety of ways.
Retail Investing’s Consequences
When COVID-19 initially disrupted markets in March 2020, retail investors functioned as a stabilizing factor, since they did not pull back when stock prices collapsed and more conventional investors balked.
Their influence on price discovery is unknown, given that off-exchange trading has grown dramatically in tandem with retail trading. Off-exchange trading accounted for 47.2 percent of total US equities trading activity in January 2021, up from 41.5 percent last year and 37.3 percent in January 2019.
Overall, the trends outlined above resulted in a surge in retail trading activity in early 2021, igniting a firestorm that has prompted increased legislative and regulatory scrutiny of the capital markets industry, as well as renewed focus on issues such as consumer protection and best execution concerns.
Many financial institutions have been implementing educational activities with tools that enhance financial literacy for self-directed investors to appeal to this increasing consumer sector. Personal coaching plans and software that allows customers to research the market and test tactics are included in these packages. These factors have combined to increase the overall level of knowledge and expertise among retail investors.
Another noticeable effect of increased retail involvement is that newly empowered investors, who may trade from any location and at any time, are reducing the seasonality of investing and encouraging more time-independent market activity.
What impact will retail investment have on financial institutions?
Financial institutions may need to adapt to this trend in order to continue meeting their clients’ requirements. As a preliminary step, companies should explore how retail investment could change in the future. This would enable them to better predict what adjustments their companies should make to their customer acquisition strategy, product mix, pricing, risk management, compliance measures, and methods for predicting and satisfying financial needs.
What is the position of retail investors in venture capital (VC)?
According to some estimates, retail investors account for less than 1% of total venture capital financing. For example, retail investment accounted for just $2 billion of the $300 billion spent in 2020. Worryingly, the problem is not the result of any retailer’s fault or constraint. Rather, the ever-widening gap between retailers and behemoths is due to some of the industry’s most chronic and fundamental issues.
Is This a Seasonal Pattern?
It may take some time to assess whether individual investors’ disproportionate effect on the markets in recent months will continue in the future. Individual investors, whether driven by short-term trading or long-term investment objectives, have the potential to permanently change conventional market dynamics, such as how retail investors, market-makers, clearing companies, brokerages, wealth managers, and hedge funds interact in the future.
Retail investors seem to be here to stay and will continue to increase in number. As more millennials and Gen Zers enter the financial markets, this transition will accelerate. Their investing strategy differs significantly from that of their predecessors.
Because of the ongoing expansion of digital infrastructure and the entry of digital natives into the industry, some experts predict that India’s online trading sector will be valued $14.3 billion by 2025.