Like many sectors, the world of investment has gone through something of a transformation in recent years.
As such, what was once the preserve of high-net-worth individuals and institutional investors is now a flourishing sector that allows a much wider range of individuals to begin investing. Largely, this transformation has been driven by the rise of new technology that has broken down many of the obstacles that aspiring investors faced in the past, allowing for greater access to the investment sector.
The emergence of retail brokerage platforms enabled investors to trade with a much smaller amount of capital than in the past, while some platforms now also allow you to invest without paying the commission fees at all.
Undoubtedly, these platforms have revolutionised the ways in which people can invest their money, and a new breed of investors has taken the investment industry by storm.
The rise of the retail trading
By removing the deterrents to investing, online retail brokers have allowed retail investors – who can be defined as nonprofessional investors who use their own money to buy, sell and manage securities – to grow in number, and become key components of the investment landscape.
According to the World Economic Forum, for example, retail investors now manage over half of global assets, with this figure set to grow to 61% by 2030. Meanwhile, its estimated that retail investors pumped a daily average of $1.3 billion into the stock markets in the first half of last year alone; clearly, their influence is significant – and growing. This was perhaps best demonstrated by the GameStop short squeeze in 2021, which showed that retail investors can now move individual stocks substantially.
In this case, at the expense of many hedge funds and institutional investors who had shorted shares for the video company, retail investors thought the company was being undervalued and orchestrated a mass buying campaign on the social media platform Reddit. This sent the company’s share price from $19.94 on the 11th of January to over $347.51 a share by the 27th of January, inflicting drastic financial consequences on those who had short-sold. Clearly, if they can move stocks as significantly as they did, retail investors must now be thought of as major players in the world of investment.
This also demonstrates how technological development and social media have been an integral part of the growing influence of retail investors. For instance, the access to information, financial tools and educational resources often provided by retail brokers have helped to produce a more financially literate generation of investors than ever. Meanwhile, the availability and user-friendly nature of trading apps, such as HYCM Trader, have allowed investors to trade more quickly and with greater frequency.
As a result, trading has become incredibly popular around the world, which the onset of the Covid-19 pandemic was a catalyst for. With more time on their hands, as well as an influx of savings due to inactivity during lockdowns, starting investing was a much easier task due to the prevalence of retail brokerage apps. As such, its estimated that there were 91.5 million US stock trading app users in 2020, up from 51.9 million in 2021, while 15% of today’s stock market investors say that they began trading in 2020.
The emergence of commission-free platforms
The rise of the zero-commission platforms began when Robinhood launched one of the first commission-free trading apps in March 2015.
The app was simple to use, allowing investors to trade stocks and exchange-traded funds (ETFs) without charging commission fees. This allowed potential investors with only small amounts of capital to invest, which made the app a smash hit. By the end of the decade, more than 6 million accounts had been opened on the platform; in 2022, this number has hit a staggering 22.8 million.
Today, Robinhood is simply a part of a growing multitude of providers that offer commission-free terms and products. But, as with any digital or online platform, it is vitally important that investors choose a trusted provider. For instance, at HYCM, we will soon be adding the possibility to buy fractional shares in stocks with zero commission in a secure environment.
Popularity of stock trading
The commission-free platforms opened easy and fast access to investing in stocks. So, another trend that has coincided with the trading boom during the pandemic was the recovery of the global stock markets, which was largely driven by retail investors. After the markets crashed in March 2020, for instance, its estimated that 20% of the trading volume in the FTSE All Share Index came from retail investors, of which 60% were buy orders.
Clearly, despite the stock markets failing, retail investors continued to back their stock market assets in a bid to ‘buy the dip’, which speaks to a long-standing principle that retail investors take a ‘nonfundamental’ stance towards investing. In other words, they tend to focus on the performance of singular stocks, rather than investing based on broader analysis of the performance of a sector or the global economy.
Retail investors seem to prefer the speculative nature of trading single stocks, rather than putting their funds into indices. According to research by BIS, for example, turnover for S&P 500 ETFs plateaued in the 4 years to 2021, while turnover for individual stocks steadily turned upward during the same period.
This is logical, as stock trading has been largely driven by corporate news, social media posts, and the actions of companies’ top management; in other words, the digitally active generation of retail investors focus on easily understandable events and recognizable company names when making their investment decisions. When Elon Musk took over Twitter, for example, Tesla stocks (NASDAQ: TSLA) went into a bear market due to concerns that his attention would be split between the two countries, while BIS says that a company’s valuation quintupled after retail investors misinterpreted a social media post as a stock endorsement.
Final thoughts
In recent years, there has been a major shift in how trading is done and perceived. Global events, technological advancement and the rise of the retail trader played a great role in the popularity of commission-free platforms and stock trading. It will be interesting to see how these trends will unfold in the years to come. For anyone thinking about starting their trading journey, they should carefully consider the risks and potential returns of any investment before depositing funds, and choose a trading platform that offers the features, assets, and protections that they need to invest with confidence.
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About the Author
Stavros Lambouris is CEO at HYCM International – an online provider of forex and Contracts for Difference (CFDs) trading services for both retail and institutional investors. HYCM is regulated by the internationally recognized financial regulator FCA. HYCM is backed by the HYCM Capital Markets Group providing trading services since 1998. The Group via its relevant subsidiaries have representations in Hong Kong, United Kingdom, Dubai, and Cyprus.
*This material is considered a marketing communication and should not be construed as containing investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. HYCM does not take into account your personal investment objectives or financial situation. HYCM makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast, or other information supplied by an employee of HYCM, a third party, or otherwise.