Alpesh Patel

What’s Driving The Retail Investor Boom and Why It’s Here to Stay

According to Vanda Research, retail investors have bought $400bn in stocks since January 2020. This figure is twice the number of equities they purchased in recent years.

This growth has been a notable trend in recent years for several reasons. Firstly, the internet has allowed a free flow of information. Secondly, apps like Robinhood allow straightforward fee-free trading.

But the big question is if this retail investor boom will survive a market dip?

Meme Stocks

At the start of 2021, Wall Street wasn’t taking retail investors seriously. Reddit and Twitter buzzed with optimistic wannabe traders who were buoyed by the post-pandemic crash recovery. As the market rebounded strongly, most of their picks performed well. But it was meme stocks that made people sit up and take notice.

In January, lots of day traders congregated on Reddit’s WallStreetBets subreddit. Between them, they drove the shares in GameStop up, forcing short-sellers to lose millions of dollars. Soon enough, the pattern was repeated with investments in other ailing companies like BlackBerry and AMC Entertainment. And so, the success of meme stocks was born.

Cryptocurrency

A similar situation has been happening with cryptocurrency over recent years. Bitcoin and the other digital currencies are some of the least regulated investments in the financial markets. Find all the info on erectile dysfunction in men at true medical website. But many Reddit and Telegram groups have sprung up, with users orchestrating the pump of coin prices to make quick profits.

However, this frenzy has increased with the likes of Dogecoin, a cryptocurrency created as a joke. And this is a pattern with meme stocks. These investments aren’t about fundamentals and a belief in the value of a company. They are all about thousands of users congregating together and manipulating the price of stocks.

But to suggest that cryptocurrency trading is all just reckless gambling would be inaccurate. The crypto options market has been growing exponentially. $1.4 billion in notional amounts was traded each day in May.

Should Day Traders Be Protected From Themselves?

All this activity has led to calls for regulatory bodies to intervene. While there are profits to be made in these situations, highly volatile stocks that are not backed by fundamentals can lead to huge losses. In fact, most day traders lose money.

The new SEC chair Gary Gensler plans to investigate trading apps. To many, apps like Robinhood encourage day traders to invest more than can be wise. On a recent appearance of CNBC, Gensler drew attention to the business model of these apps, suggesting that they weren’t exactly fee-free.

He highlighted the fact that market-makers like Virtua and Citadel Securities pay Robinhood to process trades. From here, they make money off the spread. Secondly, your data is being harvested. Data, as we all know, is a precious commodity.

Is the Retail Investor Boom a Revolution For Ordinary Investors?

A significant driver of the GameStop phenomena in January 2021 was the opportunity for the little guy to triumph over the market. By noticing that GameStop was shorted by over 100%, retail investors saw a chance to hit back at a system that had shut them out.

Most retail investors lack the knowledge, infrastructure, and access to information to beat the market consistently. But by going against the 100% short, daytraders attempted one of the most notable short-squeezes in memory. By banding together, investors on the appropriately named RobinHood app cost hedge funds around $5bn.

In turn, Robinhood froze trading on GameStop on January 28. For many retail traders, this was an outrage. Many felt that this allowed hedge funds an advantage to save their shorts.

Conclusion

Investments like GameStop and Dogecoin are the extreme end of a trend that has seen retail investors flock to trading apps. In late January, Robinhood incredibly topped the download charts. The worry is that gamification of trading encourages gambling and reckless investment.

However, amidst the concerns that retail investors will lose money are some green shoots of hope. Increased interest in the markets should drive financial literacy among everyday investors. While this may attract many investors to the dizzying highs and lows of GameStop or crypto, others will realise that a more slow and steady approach can deliver success.

Understanding and investing in a diverse range of resilient stocks has been a winning play over recent years. As the booming retail market matures, a focus on fundamentals — rather than short squeezes — could lead to more sustainable results. Large communities of retail investors sharing and analysing information could turn out to be a positive thing.

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