By Samantha Bader
Perhaps the largest surprise to come out of the economic response to the COVID-19 pandemic is the resurgence of retail investors entering the market. Retail investing, which is when consumers manage their own stocks in financial markets, has majorly expanded since March. Nearly 800,000 new accounts were opened at the three biggest brokerages alone during March and April in the United States. As lockdowns were implemented in many parts of the world, and people dealt with unforeseen financial hardships, they turned to the stock market for a distraction, and hopefully a quick buck.
The American markets, which have historically been dominated by financial institutions, are seeing almost unheard of levels of retail investing. The number of individual investors jumped to 19.5% this year, up from 14.9% in 2019 and almost double the number that was seen in 2010. Retail investing in New York has lept from 15% to 20% since the beginning of 2020.
These new retail investors are also not sticking to the traditional methods of trading their stocks. More well known institutions like Charles Schwab, TD Ameritrade, E-Trade and Interactive Brokers have seens higher numbers of people using their services, but it is the millennial investing app Robinhood that is seeing the highest growth. In the first four months of 2020, three million people signed up to use the app.
The phenomenon of retail investing has also not been limited to the U.S.A. In France, 700,000 new retail investors have been recorded by their financial watchdog service since November of 2019. In Korea, 84% of shares traded in 2020 have been on behalf of individual investors. Meanwhile, companies in Singapore have benefited from an influx of 9.6 billion Singapore dollars ($7.0 billion USD) from retail investors between January 1 and September 22. As these figures show, it is not just consumers in the USA who have turned to the stock market this year.
This surge in investing has financial experts split over how the market will respond. Some believe that concerns around the large number of first-time investors is overblown.
Christopher Smart, from Barings Investment Institute, is one such analyst. “It’s something we’ve lived with — through the dotcom bubble and market ups and downs since then — as retail investors, obviously when there’s a big run-up, it tends to draw retail investors in, late in that process,” he said. As a result, he thinks there is no need for analysts to panic.
However, according to Jeffery Gundlach, a billionaire bond fund manager believes the opposite. “Retail investor activity is downright terrifying. This is a terrible sign for the condition of the market for anybody who’s experienced a significant number of cycles,” he argued. He thinks that the amount of investors in the market without trading experience is leading to a volatile, unpredictable market.
There has already been one clear impact on the market. The American market is seeing incredibly high levels of ‘dark trading’, in which stocks are traded off the market in private venues. 43.2% of trading that took place in July was done in the dark. High profile stock exchanges such as the New York Stock Exchange are fervent proponents of the idea that dark trading harms the transparency of the market for all investors, but that concern is not stopping the activity from taking place.
All in all, the rise in retail investing is causing many financial analysts to adjust their expectations and predictions for the 2020 markets. Overall economic downturn around the world is still a grave cause for concern, but some markets are being buoyed by the retail investment taking place. It remains to be seen, however, if this can last in the long term.
Photo by William Iven, Unsplash