The Rise of Retail Investors in Equity Trading |
The stock market has completely transformed in recent years, due to the rise of retail investors. The market was previously dominated by institutional investors, however, as it is now easier than ever to open a position in the financial market, amateur investors have shifted the balance of the scene and now represent around 23% of all equity transactions in the United States, up from just 10% in 2019.
This increase can be largely attributed to the disposable income that many households have gained from multiple COVID-19 lockdowns, unable to purchase vacations or travel.
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If you have never invested in the stock market before and are considering opening a position, we recommend that you learn how to get involved in online stock trading before you start trading. It has never been easier to start trading, but at the end of the day you put your capital at risk when you buy stocks because the market is extremely volatile.
Once you’ve done your research, you can join the army of retail investors and see if you can find any profitable opportunities. In this article, we’ll explain what a retail investor is, and explore how and why they disrupted the regularity of the stock market.
What is a retail investor?
As mentioned earlier, a retail investor is a non-professional natural person who has placed part of his capital on 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 are trading with their own capital, whereas institutional investors are investing for other people.
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Because retail investors manage their own capital, their investments are generally goal-oriented, usually with the goal of saving for retirement, a deposit for a house, or a smaller goal like paying for a vacation. Since retail investors do not have the same authority over the stock market as institutional investors, their transactions are subject to higher fees. As a retail investor, you will need to cover a variety of these costs, including commission and marketing.
The majority of retail investors are under 35 and are generally tech-savvy people who depend on their smart devices. As a result, one of the main attractions that drives this age group to invest is the ease of opening a stock trade on a trading app. In fact, one of the main Robinhood platforms welcomed 3 million users at its service in 2020 – an increase of 30% over the previous year.
Trading apps are attractive to young beginner investors because they allow them to invest in splits. This means you buy a fraction of the stock, making stocks like Tesla (TSLA), Apple (AAPL), and Coca Cola (KO) easily accessible.
Why did the retail investor disrupt the stock market?
Being hobbyist traders, retail investors generally have little knowledge of the stock market and their purchases are largely influenced by trends, news and social media. A recent example is the Gamestop Crash (GME) which took place in January 2021, where retail investors were encouraged to invest in the video game retailer, when a forum on Reddit rallied individuals to invest. This skyrocketed the value of the company’s shares from $ 17.25 to $ 483.
This increase did not only affect the stock itself, as the volume of traffic caused disruption on several trading platforms including Robinhood and Charles Schwab. As a result, Robinhood had to restrict trading in Gamestop, as well as other actions, as it couldn’t risk experiencing the same levels of disruption again.
The retail investor can cause such a big disturbance in the stock market as he tends to buy stocks that have unexpected profits. A profit surprise occurs when a company’s annual or quarterly profits are much higher or lower than an analyst’s forecast. When amateur investors flock to a stock that experiences a profit surprise, it drives its prices up 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 on the stock market in the future. Although their portfolios are small, retail investors collectively can have a significant impact on the financial market landscape.
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