The coronavirus pandemic has disturbed every aspect of life and caused severe economic grievances across the United States. Millions of people have lost their jobs or faced income cuts. Unemployment has reached historic highs. Small businesses are struggling to survive. Some major industries have suffered catastrophic losses. But amid all this uncertainty, retail investing has noticed a substantial surge in momentum and fueled significant stock market volatility. As compared to larger institutional investors, a retail investor purchases securities for her own personal investment account in much smaller amounts. While retail investor participation in the stock market has followed an upward trajectory for the past few years, retail investing as a share of total market activity has almost doubled compared to its previous levels in the first half of 2020. What factors have contributed to this increase in retail investment activity? What are the potential downsides of this change in investor behavior? Furthermore, will this trend continue once the pandemic effects subside?
The rise of mobile technology has disrupted the ways of traditional investing. By removing the expensive and tedious barriers to entry associated with stock market investing – such as trading fees, minimum balance requirements, and broker commissions – online services such as E-Trade and TD Ameritrade as well as further simplifications made possible through smartphone apps such as Robinhood and Stash have created a conducive environment for widespread retail investing. The accessibility and convenience of these platforms are the driving forces behind the rising participation by everyday investors in the stock market.
For many novice investors that are driving the surge in retail investing, the pandemic additionally presented two more advantages – time and cash. Following social distancing guidelines as well as working from home has left many people with a lot of time on their hands. Furthermore, reduced expenses on dining out, childcare, and travel have left young investors with a lot more cash at hand. When recessionary winds first started blowing, cashing in on these advantages allowed many investors to take advantage of low investment prices. This has led to significant trading activity through investment apps and online brokerage accounts despite the country’s economic slump.
It is worth noting, however, that everyday investors are more likely to invest in companies they are familiar with, which are usually a part of the S&P 500. But smaller companies that are still hurting are unable to take advantage of such investor activity. Moreover, retail investors are more likely to overreact to market news which further increases the riskiness of an already volatile stock market. Institutional investors are faced with the added responsibility of being cognizant of such fluctuations while making larger investment decisions.
From a behavioral finance point of view, the current preference and interest in investing through apps could just be a form of “entertainment investing” due to the current lack of other entertainment options such as sports or concerts. But if that isn’t the case, then oversight of retail investing platforms will gain a lot more attention once the recession effects die down. Only time will reveal whether this trend towards increased retail investing is just a consequence of pandemic related conditions or an indication of a more permanent structural change in the way the financial market operates. Regardless, investors who have gotten used to stock picking and trading from the comfort of their homes will likely continue taking advantage of the investment apps and online brokerage opportunities throughout the recessionary period to reap the benefits of potentially high future returns.
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nice article
Thank you!