The stock market has completely transformed in the last few years, because of the rise of retail investors. The market was previously dominated by institutional investors, however, since its now simpler than ever to open a position in the financial market, amateur investors have shifted the balance of the scene and now make up around 23% of all equity trading in the US, compared to just 10% in 2019.
This increase can largely be attributed to the disposable income that many households have acquired as a result of multiple COVID-19 lockdowns, unable to purchase holidays or travel.
If you’ve never invested in the stock market before and are considering opening a position, we recommend that you learn how to get involved in stock trading online before you start trading. It has never been easier to start trading, but ultimately, you are putting your capital at risk when you purchase stocks, since the market is extremely volatile.
Once you’ve done your research, you could join the retail investor army and see if you could find some profitable opportunities. In this article, we will explain what a retail investor is, and explore how and why they have disturbed the regularity of the stock market.
What is a retail investor?
As previously mentioned, a retail investor is a non-professional individual who has placed some of their capital in the stock market. Of course, the most significant difference between a professional and non-professional retail investor is the size of their portfolio, and the fact that they trade using their own capital, whereas institutional investors invest for other people.
As retail investors are managing their own capital their investments are usually goal-driven, typically with the aim to save for retirement, a deposit for a house, or a smaller goal, like paying for a holiday. Since retail investors do not have the same authority in the stock market that institutional investors have, their trades are subject to higher fees. As a retail investor, you’ll have to cover a variety of these fees, including commission and marketing.
The majority of retail investors are under the age of 35 and are typically tech-savvy individuals who are reliant on their smart devices. As a result, one of the main draws that causes this age group to invest is how easy it is to open a trade in the stock market on a trading app. In fact, one of the leading platforms Robinhood welcomed 3 million users to its service in 2020 — a 30% increase on the previous year.
Trading apps are attractive for young, first-time investors because they enable them to invest using fractionalisation. This means that you buy a fraction of the share, making the likes of Tesla (TSLA), Apple (AAPL) and Coca Cola (KO) stock, easily accessible.
Why has the retail investor disrupted the stock market?
Since they are amateur traders, retail investors typically have little knowledge of the stock market and their purchases are largely influenced by trends, the news and social media. One recent example of this is the Gamestop (GME) crash that took place in January 2021, where retail investors were spurred to invest in the video game retailer, when a forum on Reddit rallied individuals to invest. This caused the company’s shares to skyrocket in value from $17.25 to $483.
This surge didn’t just affect the stock itself, as the volume of traffic caused disruption across multiple trading platforms, including Robinhood and Charles Schwab. As a result, Robinhood had to restrict trades of Gamestop, as well as some other stocks, because it was unable to risk experiencing the same levels of disruption again.
The retail investor can cause large disruptions in the stock market of this kind because they tend to buy stocks that have earnings surprises. An earnings surprise occurs when a company’s annual or quarterly profits are far more or less than the analyst’s forecast. When amateur investors flock to a stock that is experiencing an earnings surprise, this drives its prices exponentially, changing the landscape of the stock market.
Retail investors are a force to be reckoned with and are likely to continue to have a significant influence in the stock market going forward. Though their portfolios may be small, collectively retail investors can have a significant impact on the landscape of the financial market.