The Rise of the Retail Investor
One of the most interesting trends sprouting from the coronavirus pandemic has been the rise of the retail investor (non-professional traders who purchase assets such as stocks, bonds, ETFs, etc. through a third-party brokerage firm). The coronavirus pandemic coupled with other factors such as social media-focused craze and increased access to zero commission trading championed by companies like Robinhood has doubled the market share of retail investors from 10% in 2019 to a whopping 25% of the market in July 2020.
This trend has already shaken up the market, typified in the current GameStop sage. Retail investors flocked to traditionally shorted companies to take a stand against the Wall Street establishment including hedge funds like Melvin Capital and Citron research. The 2-million strong Reddit subreddit r/WallStreetBets acted as the catalyst for this movement that saw GameStop closed the week up 400% and AMC up +278%. This clash between retail investors and the financial “establishment” only heated up after brokerage firms like Robinhood and TD Ameritrade restricted trading to certain WSB favorites such as the aforementioned GameStop and AMC as well as others like Nokia and Blackberry.
So, what will be the fallout from this saga?
1. Expect even more scrutiny on Main Street and maybe even legislation. In a statement, the SEC vowed to protect individual, retail traders and also promised to scrutinize actions taken by brokerages that may “disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.” Lawmakers were also quick to condemn the actions taken by Robinhood and other brokerage firms against these retail investors with Congresswoman Alexandria Ocasio-Cortez and Senator Ted Cruz among the notable politicians from both parties to comment on the situation.
2. The rules of engagement in the stock market will change. Fueled by the increased participation of retail investors smaller-cap companies (generally characterized by lower per-share prices and higher volatility) might find increased support among retail investors. The stock market may look extremely different with the power that these retail investors now wield – higher volatility, share price and valuations that reflect a less experienced market of investors, and some sectors that benefit more than others with technology, cannabis, and gaming being favorites of retail investors.