However, Covid-19 provided the impetus needed to attract young investors from all around the globe to the financial markets. Government stimulus programs in the United Kingdom and the United States placed money in the hands of those who were stranded at home due to lockdowns and had no other option than to try their hand at trading to improve their financial stability.
Who are retail investors and what do they do?
The non-professional equivalent of institutional investors is retail investors, sometimes known as individual investors or amateur investors.
Apart from their average portfolio size, one of the most significant contrasts between retail and institutional investors is that retail investors trade with their own money. Smaller investors were formerly generally excluded from the stock market, but the emergence of digital trading platforms offering no-minimum investment accounts and low- or no-commission choices has made investing more accessible than ever.
Retail investors may be divided into two categories: those who manage their own accounts using applications like Robinhood or TD Ameritrade, and those who employ a financial adviser to make investment choices on their behalf.
In the recent year, there has been a significant growth in both categories. Many individuals in the United States took advantage of their economic stimulus funds and spare time at home to begin investing. This tendency has expanded around the world, with technological advancements making it simpler than ever to begin investing, even in little amounts.
Characteristics of typical retail investors
• Most investors are under 35 years old
• The majority are complete newcomers to the stock market
• A wide range of experience levels, but generally low institutional knowledge
• Primarily buy and sell trades in the equity and bond markets
• Invest lesser amounts than large institutional investors
• Highly willing to take large risks, greater freedom to experiment
• More likely to invest based on personal affinity
An ever-increasing impact on global marketplaces
Despite the fact that individual retail investors lack the purchasing power of big institutions, they together control vast sums of money.
In January 2021, about six million consumers in the United States downloaded trading apps, resulting in record-high average daily volumes for equities and options transactions in retail brokerages. According to Credit Suisse, individual investors accounted for a third of all stock market activity in the United States at various points in 2021.
Retail investors, on the other hand, invest much less in the markets than institutional investors. However, their overwhelming numbers in 2020-21 swayed the markets. Consider the events of January 2021, when GameStop's stock soared and the phrase "meme stock" was invented. Reddit users took on institutional traders, bolstering GameStop's stock and driving its price up more than 1,700% since December. According to Credit Suisse, individual investors will account for a third of all stock market activity in the United States in 2021.
Real-time data and more sophisticated financial tools have ushered in a new era in which individual investors have more power than ever. As the influence of individual investors grows, financial institutions may need to reassess their client acquisition strategy, customer experience, and pricing methods, among other things, in order to suit their requirements.
A Changing Market
Individual investors in the developing group include both seasoned investors who expanded their trading activity in 2020 and younger, first-time investors who have less discretionary money. According to a recent study, investors who established their first retail brokerage account in 2020 had some features in common. They are usually more ethnically diverse, have lower account balances, and trade more often. They also seek financial guidance at a rate that is around half that of experienced account owners. More experienced investors, on the other hand, are likely to have more money and may have accounts with both conventional wealth management organizations and internet brokers.
Social media seems to have a significant effect on investing choices for both kinds of investors. Many of these investors pride themselves on rejecting conventional thinking, yet the places they attend may be full of disinformation, self-serving counsel, and incorrect suggestions. As a consequence, it is not uncommon to see these investors engage in perplexing and unusual trading behavior.
Many financial institutions have developed educational activities and tools to enhance financial literacy for self-directed investors in order to appeal to this consumer niche. Personal coaching plans and software that enables customers to research the market and test tactics are included in these packages. These developments have started to broaden the knowledge and expertise of retail investors as a whole.
"As they attempt to continue fulfilling client demands, financial institutions may need to reassess their acquisition strategy, customer experience, and pricing strategies, among other things."
Financial Institutions: A New Approach
Retail investors' increased power will almost certainly have a significant effect on existing brokerage companies and their operations. Brokerages may begin assessing their client onboarding procedures to analyze risks in order to remain ahead of these transformational forces. Firms must also ensure that they have standards in place for assessing whether investments are appropriate for new account holders, as well as a record-keeping approach that can demonstrate that best-interest duties were met when offering goods and services.
Some companies may decide to implement extra investor protection safeguards, such as regulations that limit the use of leverage and derivatives. They may also consider introducing additional customer support features, such as 24-hour helplines and other live assistance options, such as the ability to speak with a licensed broker. Firms that are properly registered as broker-dealers and investment advisors may wish to consider providing extra staff training on how to better communicate with consumers about the hazards of investing in high-volatility products.
To combat the flood of disinformation that retail investors receive online, several activists have recommended mandating yearly investor continuing education. These organizations might leverage their experience to create user-friendly and engaging programs, such as virtual-reality-based learning modules or courses on fundamental financial concepts embedded in popular video games.
Financial institutions may provide an experience that is both technologically advanced and human-centered in order to attract the growing number of individual investors. To evaluate if changes in a customer's behavior or circumstances signal an opportunity for one-on-one investor outreach, brokerage companies may depend on near-instantaneous data from several sources. They may then determine the most successful marketing message timing, content, and distribution model.
Finally, if zero-commission trading becomes more common, certain financial institutions may need to reconsider their pricing approach. Premium memberships for accounts that enable complicated operations such as derivatives trading might be one alternative.
Individual investors will certainly exercise increased influence on the market and the businesses that interact with it as retail investing grows more widespread, including banks, brokerage firms, and traditional investment companies. Now is the moment for financial institutions to pay careful attention to the rising empowerment of retail investors, and to adapt their services and approaches to keep up with their changing needs.
• Due to cheaper and friendlier trading platforms, there has been a recent surge in retail investors
• Most of them are first-time investors who previously were unable to invest in the stock market due to a lack of funds, access, or knowledge
• These investors are largely influenced by social media and popular trends, rather than institutional knowledge or traditions
• Though individuals may have small portfolios, they collectively make up a huge mark
Financial institutions that want to take advantage of the growing number of retail investors should concentrate on education, communication, and social involvement.