In recent years, there has been a significant rise in the number of retail investors investing in the stock market. This surge can be attributed to various factors, including advancements in technology, the COVID-19 pandemic, and regulatory changes.
Retail investors, once considered a niche segment, are now taking centre stage and playing a crucial role in shaping the investment landscape. In this article, we will explore the key trends and behaviours of retail investors and their impact on the financial industry.
The Rise of Retail Investors
The COVID-19 pandemic and the accessibility of commission-free trading apps have been catalysts for the surge in retail investors. Millions of individuals turned to stock investing as a means to make use of the resources and free time they had. The stock market rebounded quickly after the initial crash from the pandemic, attracting a new wave of young and tech-savvy investors who saw the potential for growth, particularly in the technology sector.
According to Charles Schwab, up to 15 percent of retail investors may have made their first-ever investment in 2020. These investors are no longer passive participants in the market but active stakeholders who seek to influence corporate decision-making. The democratisation of markets and the amplification of retail investor voices through technological advancements have given rise to a new era of investor engagement.
The GameStop saga in early 2021 exemplified the power of retail investors to influence market dynamics. While the events surrounding GameStop may not represent the typical behaviour of the entire retail investor community, they have undoubtedly influenced the perception of retail investors’ impact on the market. Retail investors are increasingly making their voices heard, demanding transparency, accountability, and change in corporate governance practices.
Factors Driving Retail Investor Engagement
Retail investors have distinct motivations and behaviours that set them apart from institutional investors. They are attracted to the stock market for various reasons, including earning passive income through dividends, protecting their money against inflation, and supporting companies that align with their viewpoints. Retail investors also have the advantage of being able to wait for the right market conditions before they invest their money, allowing them to sit out during times of high volatility or uncertainty.
Furthermore, retail investors are increasingly interested in Environmental, Social, and Governance (ESG) investing. They seek to invest in companies that align with their values and are committed to sustainability and social responsibility. This growing interest in ESG issues has prompted retail investors to engage with companies on topics such as board diversity and sustainability. In turn this has driven regulators to introduce laws that require greater transparency and disclosure of ESG-related information from issuing organisations. In fact, disclosure of ESG news, pertaining to the value of the stock, resulted in higher trading activity among retail investors.
Regulatory Changes and Retail Investor Empowerment
On the topic of regulatory changes, many regulations have contributed positively to the empowerment of retail investors. The European regulatory agenda, including MiFID II, UCITS, AIFMD, and the Shareholder Rights Directive (SRD II), has focused on improving investor access to funds, increasing transparency, and granting retail investors more voting rights. These regulations aim to level the playing field between retail and institutional investors and promote retail investor engagement in corporate governance.
The Role of Technology in Retail Investor Engagement
Technology has played a significant role in empowering retail investors and democratising access to the stock market. The rise of digital trading platforms, such as Robinhood and Etoro, has made investing more accessible to a broader range of individuals. These platforms offer commission-free trading and the ability to buy fractional shares, allowing investors with limited funds to participate in the market.
Additionally, technology has facilitated real-time communication and interaction between companies and retail investors. Digital platforms, like Proxymity’s Vote Connect, enable investors to attain accurate and timely information directly from the issuing company, ensuring transparency and facilitating shareholder engagement. Retail investors can now have a more active role in voting and decision-making processes.
The Future of Retail Investing
The rise of retail investors is not just a temporary occurrence. It is a trend that is likely to persist and shape the future of investment. Retail investor activity will continue to have a significant impact on the market, potentially shifting dynamics between clearing firms, market makers, brokerages, wealth managers, and hedge funds. To adapt to this evolving landscape, financial institutions need to assess and transform their business models, pricing strategies, and customer experience to cater to the needs and preferences of retail investors. More importantly, they need to adopt the right technology to ensure that they are maximising engagement. By embracing these trends and adapting to the needs of retail investors, financial institutions can stay ahead and build lasting relationships with this empowered segment.
For a deeper understanding of retail investor trends and effective strategies for engagement, we invite you to download our comprehensive report: Best Practice Report: Rethinking Retail Investors. Gain valuable insights that will empower your approach to retail investors in this evolving landscape.