While the past two years since the start of the pandemic have largely been characterised by market volatility and uncertainty, they have also revealed something else: a retail investing boom.
Droves of retail investors have turned to the financial markets in search of returns on their investments. A confluence of macro trends had led to this tipping point at the start of the pandemic, including zero (and negative) interest rates, a deeper understanding of the impact of inflation on the value of fiat currency, an acceleration of digital transformations, as well as the lowering of barriers to entry through automation, fractional shares and commission-free stock investing. The surge in trading volume carried through to 2021, when unprecedented global interest in the GameStop phenomenon led to the meme stock rally.
According to Bloomberg Intelligence data, 20% of US equity trading could be traced back to retail-investor participation in 2020. In the first quarter of 2021, the number stood at 23%, which translated to a stock market footprint that was comparable with all hedge funds and mutual funds combined. With the US at the epicentre of an international stock market shift, the retail trading boom inevitably spilled over to other regions including Asia, where digital brokers and investment platforms saw a spike in retail investor participation.
As we move into 2022, we expect a high level of retail participation to continue, driven by a new generation of investors being more curious than ever before about the markets and their own investments. Against this backdrop, digital brokers and social investment platforms would need to embrace this shift and adapt to the changing needs of their clients by focusing on three areas that investors are primarily looking for in a platform: (1) simple access to the assets they want to invest in (2) an intuitive and user-friendly mobile interface and (3) financial education.
Access to assets
Traditionally, retail investors have been deterred from entering the financial markets by high costs, a perceived knowledge gap, and a lack of access to many types of investments. Today, the convenience and myriad of choices offered by smartphone and digital usage have transformed consumer habits and expectations of online products. With the pandemic serving as a catalyst for accelerated digital transformation across industries, there has been increased demand among users for intuitive, engaging, and easy-to-use products.
At the same time, the financial technology industry is beginning to see startups modify their business models to offer more options to consumers. To target long-term profitability, maturing fintech companies now need a wider array of products to attract new users and retain early adopters. For instance, zero commission offerings – mostly for stock trading – have become commonplace in the US and are beginning to gain traction in other markets, where consumers increasingly cite low costs and ease of use as prominent attractions.
With providers adding additional elements to their product offerings, retail investors increasingly have access to a suite of holistic wealth management tools. This may include a wide range of global equities, additional asset classes, risk-based model portfolios, and access to research and educational materials. By removing the traditional barriers to entry, digital brokers and investment platforms can play an active role in promoting greater retail participation in, and knowledge of, capital markets.
A user-friendly interface
With the rising number of entrants in the market, investment platforms will need to demonstrate their ability to innovate and to bring new technology-driven products to market. Over the last decade, there have been multiple periods of high demand from users, with the latest being 2021’s meme stock rally. Platforms will need to be well prepared to handle the increased demand by continuing to invest resources in infrastructure and operations so that they can continue to support millions of transactions daily across multiple markets and regulatory jurisdictions. In addition, platforms should maintain the functionality and infrastructure needed to localise products and services to meet heterogeneous and dynamic regional regulatory requirements and consumer needs.
To ensure that their platforms remain intuitive, it is key that platforms prioritise the simplification of the investing experience, expansion of the suite of assets, introduction of tools and data, and accessibility to information that users need to effectively invest in global markets.
As the retail investment market matures and platforms scale, platforms must bear an even greater responsibility to ensure that its users are well educated and aware of the risks of trading and investing. There are a few main methods to encourage responsible investing and financial literacy, including providing financial education, displaying comprehensive risk disclosures and maintaining regular communication with investors.
Amidst a deluge of financial information online, it is imperative that investors have access to a variety of credible and free tools to help them to learn about the financial markets. One example of facilitating an introduction to investing for new users includes setting up demo accounts, in which users are encouraged to start with in order to practise trading and investing without risk by using virtual money.
As social media is increasingly interacting with the markets, anticipating or exacerbating movements, it is important for users to be cautious and to conduct their own research into particular stocks whose prices have risen meteorically. In addition to educating users to consider and define their risk appetite, platforms should maintain regular communication with its users about risk, especially in highly volatile investment products, and encourage users to diversify their portfolio.
Looking toward the new year, we expect the new generation of investors to continue to play an influential role in the capital markets and shape the investment landscape. To capture this growth, investment platforms will need to futureproof their technology-led platforms and strengthen their capabilities in order to gather steam to meet the increased demand from retail investors.
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CEO Singapore & MD for Asia, eToro