Retail investing has undergone significant changes in recent years, with new technologies and platforms making investing more accessible to the average person. Understanding key retail investing trends provides insights into how individual investors are participating in the market. Based on retail investing presentation decks from top financial institutions in 2020, this article summarizes five major trends impacting retail investors.
Rise of commission-free trading platforms
A major trend in retail investing is the rise of commission-free trading platforms such as Robinhood and Webull. These platforms allow individual investors to trade stocks and ETFs without paying commissions. Retail investors have flocked to these platforms, with Robinhood reaching over 10 million users in 2020. The ease of access and zero commissions have made day trading and high frequency trading more feasible for retail investors.
Growth in options trading
With commission-free stock trading becoming standard, retail investors are looking for other ways to generate higher returns. Options trading has exploded in popularity, with retail options volume increasing over 40% in 2020. New educational platforms and analysis tools have enabled retail investors to better understand options strategies. However, options carry significant risks and most retail traders lose money. Managing risk is critical for any retail investor venturing into options.
Shift towards passive investing
Passive investing through index funds and ETFs has become increasingly popular among retail investors. Over 50% of retail assets are now held in passive investments, compared to just 16% in 2008. Passive investing provides broad market exposure at low costs. With active management often underperforming benchmarks, more retail investors are embracing the passive approach.
Rise of fractional share investing
Fractional share investing allows retail investors to purchase fractions of stocks. Instead of needing the full share price, which can be hundreds or thousands of dollars for high-priced stocks, fractional shares enable investing fixed dollar amounts. This makes it easier for smaller retail investors to gain exposure to top companies. Over 60% of retail investors now utilize fractional share investing.
Increased retail participation in IPOs
Retail investors have historically had limited access to IPO shares, with most allocation going to institutions. However, retail brokerages are now providing ways for individuals to invest in IPOs. For example, Fidelity allows retail investors to indicate interest in upcoming IPOs. While institutional players still dominate, retail participation in IPOs is on the rise.
Key retail investing trends like commission-free trading, passive investing, and fractional shares are empowering the individual investor. However, with greater access comes greater responsibility in learning risk management. Overall, the democratization of investing provides opportunities, but education on prudent strategies is vital.