As the stock market has rallied since its sharp fall in March, a record amount of individual retail investors have entered the market. This influx has been driven by millions of Americans with more time on their hands, and in some cases out of work, due to the impact of the coronavirus pandemic. The pandemic has accelerated the rise of individual day traders participating in the market underpinned by the popularity of app-based brokerages such as Robinhood, which pioneered a model of commission-free trading.
Robinhood’s commission-free trades have helped it attract a large user base and spurred more established competitors in both the e-Trading Software Developers industry and the Securities Brokerage industry in the United States, such as e-Trade and Charles Schwab, to offer commission-free trading as well in order to attract a larger client base. Robinhood is rapidly gaining prominence in the industry as a result, with Robinhood users trading nine times as many shares as E-Trade customers, which has historically been the largest company in this industry.
Social media fuels day trading
The rise of day trading has also been fueled by online communities dedicated to stock trading on platforms within the Social Networking Sites industry in the United States, such as Twitter, Discord and Reddit. Communities on these platforms allow individual investors to swap stock tips and inform each other of market news. As the number of retail investors increase and these online communities grow in popularity, they have begun to exert increased influence on the markets. For example, Tesla stock has risen sharply since March, driven in part by the momentum generated by online stock trading communities.
According to Goldman Sachs, during the stock market rally following the crash in March, stocks popular with individual investors have generally outperformed stock primarily held by institutional investors, such as hedge funds and mutual funds. Beyond institutional investors, this trend is expected to have ripple effects on other industries as well. As independent retail investing becomes more common, more individuals may choose to manage their own investments by default. A continuation of this trend could potentially reduce demand in the long run for the services provided by the Financial Planning & Advice industry and the Portfolio Management industry in the United States.
Rising concern calls for potential guardrails
Nevertheless, there is some concern about the ability of retail investors to make wise investment decisions in the long-term. Multiple studies have shown that the more individual investors trade stocks, the worse those investments perform, with even worse returns when investors get involved with stock options. After some high-profile incidents surrounding individuals who acquired large losses on the platform, Robinhood has pledged to put some guardrails in place around options trading and other high-risk investments. Overall, while the rise of the retail investor will likely ensure the continued popularity of online and app-based brokerages, it remains to be seen whether this trend will hold among inevitable bouts of market volatility.
