The pandemic has impacted people from all walks of life in some shape or form and retail investors are no exception who have been adapting and employing new strategies to make most of the recovery phase. In addition to traditional retail investors adopting new trading techniques, Pandemic has created a new class of retail investors who are bringing notable new trading trends to the table.
While some of these trends have to an extent settled down, the portrait is still very much developing as these investors learn and inform in the wake of new economic realities on the horizon. While their share has been continuously growing, they now represent a sizeable slice of the market. According to a survey conducted by Charles Schwab based on an analysis of about 500 investors, the brokerage found that 15% of current retail investors began playing the market in 2020. Schwab — which now hosts 31.5 million retail clients and $6.9 trillion in assets because of the retail investing boom ( External Source Charles Schwab )
A recent report from the Financial Industry Regulatory Authority (FINRA) and University of Chicago found that market dips that made stocks cheaper to buy and the ability to invest with small amounts were among the top reasons younger and inexperienced investors reported entering the stock market. For respondents who opened new accounts in 2020, investing for retirement was the most frequently cited reason for opening the account, despite the study’s focus on taxable investing. Researchers further found that the majority of new investors—meaning those who opened a non-retirement investment account for the first time during 2020—were under the age of 45 and had lower incomes than investors who already owned taxable investment accounts prior to 2020. New investors were also more likely to be racially or ethnically diverse ( External Source FINRA)
This new breed of retail investors can be categorized into two broader segments. The foremost segment is the younger, tech-savvy first-time investors who are very much learning on the trade and are widely impacted by influencers. The second group comprises relatively experienced investors looking to expand into portfolios not previously practiced by them. Most of this new breed of retail investors are young to middle age who live and breathe on the social media platforms thus making notable waves. Various social media platform play a critical role in how these cohorts receive and process information which ultimately inform their investment decision-making.
Tech strides have enabled these digitally savvy investors to turn to ample apps available on the market such as Robinhood. These trading platforms seem to have provided these retail investors with best of both worlds that is affordable investment thresholds coupled with semi-automated trading algorithms to maintain balance while moving on this risk and reward curve.
These new trading platforms have introduced killer features of no minimum balance requirement coupled with zero percent fees. These fantastic features are attracting new investors in droves which is exploding the retail trading sector post-pandemic. While the zero brokerage commissions are offering an influx of retail investors for the brokers this seems to be pushing the brokerage industry itself to a likely consolidation in coming months.
Fractional shares trading has been another landmark measure revolutionising the retail investing boom in terms of scale and spread. Fractional shares have brough such fanfare to traders that post pandemic it has essentially become part and parcel of most brokerage offerings which is magnating millennial investors to retail investing at scale.
Another area of retail investment spreading at scale is Options Trading something which the second savvier segment of new portfolio investors are getting particularly attracted towards. While Options Trading is adding volumetrically to the trading volumes it comes with its own pros and cons. Given the relatively savvy nature of this cohort of investors they are better positioned to mitigate the risk which can come saddled with options trading. Amongst this group of retail investors Call Options are more popular due to their potential for promising payouts. The share of these small cap option traders is constantly increasing and changing the option trading landscape in quarters to come.
Yet another relevant factor which is likely to continue the retail investing drive is inflation and interest rates. With both of these macroeconomic metrics on the rise , a well hedged retail investment portfolio will likely offer above inflation returns to these retail investors compared to traditional segments.
Its perhaps little too early to predict whether the outsized influence of these new cohorts of retail investors will persist. Multiple motives for this investor group will maintain the calculus complex in terms of strategic shifts to come however its envisaged that these exciting new investors will continue making meaningful impact on trading platforms, market makers and brokers alike. Adapting to these strategic shifts could be critical for all trading ecosystem players in terms of how to carve out a sustainable strategy to continue serving their core customers. All the ecosystem players will need to make concerted effort on building and maintaining trust and offer improvised solutions to keep nurturing this exciting new breed of retail investors in the interest of all stakeholders of the system.