When we look back at the financial headlines from the 2020 global pandemic, the rise of retail traders during one of most volatile and exuberant stock markets in recent history will no doubt stand out. In essence, we have witnessed a seismic shift that has sparked much greater participation in financial markets. This empowerment of retail investors is helping individuals to better navigate their financial by harnessing the benefits of long-term compounded growth that only investments can offer in a time of zero or even negative interest rates. Importantly, investments are also one of the most effective ways of making an impact on the world.
Levelling the playing field
Almost ten years of monetary easing, endless QE programmes and negative interest rates have had enormous effects on the social fabric and inequality in society. Real estate, private equity and stock markets have rallied thanks to support from a loose monetary policy, something which has benefited assets owners but excluded the vast majority from benefiting from the rallying markets. Many people are frustrated by a feeling that only an entitled and privileged elite is benefiting from the progress of the world and many feel that their vote in elections does not make the impact they are hoping to make in the world.
Answers to these issues are complex and many-facetted, but broader participation in capital markets is a part of the answer. When you invest you get the ability to profit from value creation of companies to help you live out your dreams and at the same time support the companies and industries that matter to you.
The continued trend of citizens taking control of their investments is an important step towards the true democratization of financial markets, where people are not only taking more control of their financial futures but also taking stakes in the companies that shape our world.
The growth in retail investing is staggering. Collectively, retail investors now account for nearly a fifth of all US stock market trading, and up to a quarter on most volatile days, according to recent data. While the pandemic may have given rise to a number of traders who see the rising stock market as an opportunity to ‘make a quick buck’, the vast majority of retail investors have continued to incrementally take control of their investments.
While volatile markets present many opportunities for the savvier traders, they have indisputably attracted a much larger group of long-term investors who previously had banks manage their money — many of them with high and opaque fees delivering mediocre returns — or those new to investing who simply held their savings in cash.
Some rather arrogantly lump together all retail investors as ‘dumb money’ chasing a stock market bubble. On the contrary, many retail investors remained calm and invested during the rapid market correction in March unlike many professional fund managers who were quick to offload their holdings to then find themselves playing catch up as the markets quickly rebounded and soared to record highs.
At Saxo Bank we have experienced the huge global appetite for retail investing first-hand as we welcomed more than 80K clients in the first half of 2020. For the vast majority of them it is about time in the market — and not necessarily about timing the market.
The increase in retail investor participation in capital markets and their desire to take control of their financial future is to be applauded but comes with an important role for investment providers.
When the dust settles on the current stock market exuberance, the investment platforms and providers that will thrive will be those that realise that increased retail participation is here to stay —and critical to keeping investors engaged over the long term is to not only provide access to global markets, but to equip investors with the right tools, content, analysis and services needed to make well-informed decisions.
We have a great task in guiding clients on their full investment journey. From inspiring informed investment decisions to risk management and encouraging proper portfolio diversification — particularly for long-term investors, owning a few shares is often better than not owning any at all. But ensuring a well-diversified portfolio across industries, asset classes and geographies is key to longstanding success.
There is more to retail investing than zero-commission trading
In our opinion, the frequently cited explanation of the rise of retail investing being linked to zero fee commissions, especially in the US, is simplistic. Firstly, the growth of the retail investor segment is global and not just an American phenomenon. Secondly, this suggests not paying to invest is the catalyst. Lower fees and commissions are not new – they are part of a trend that has been evolving for more than three decades, making retail investing more accessible. Since I founded Saxo Bank in 1992, we have been a part of this journey.
Thirty years ago, the industry was dominated by opaque prices and constrained offerings and where traditional banks would easily charge clients $100 in commissions on simple stock trades with little transparency and poor execution. In 1992, I founded Saxo to disrupt the market by using better technology and pushing innovation that put the client first. Challenges from Saxo and others have changed the market status quo, and this has driven commissions to a level where everybody can invest and trade.
Some commentators believe that retail trading will collapse when the stock market turns bearish. This view may be true for a small percentage of retail investors who were attracted by the opportunity to make fast money, but for the largest majority of investors the freedom and opportunity to invest is only just the beginning of their journey towards gaining more control and impact their own financial future — and the future of our society.
By Kim Fournais, founder and CEO, Saxo Bank