How Technology And Next-Gen Investors Are Driving The Democratization Of Investing
We are experiencing the greatest wave of market democratization in modern times.
In the last 12 months, despite a global pandemic, investors have poured record amounts of money into financial markets. This surge has been transformational. The global investor base is becoming more diverse as markets attract new retail investors. Many of them are young and tech-savvy with access to a host of new asset classes, like cryptocurrencies and non-fungible tokens (NFTs).
With market participation booming and new investment vehicles rapidly emerging, every member of the investment community must work to ensure that new entrants have the information and support they need to compete on a level playing field. Doing so will help all of us, not just new investors, avoid negative outcomes.
Rise of the Mass Market
With quarantine keeping consumers at home with money in their pockets, investing became a prominent topic on social media. That interest was fueled by many online brokerages eliminating commissions on most stock trades. This lowered a key barrier for participation and spurred a truly revolutionary change. Even after stock commissions were deregulated in 1975, trading fees often prevented small traders from using financial markets as their own little casinos. Last year, Charles Schwab removed its stock trading “cover charge,” and the rest of industry soon followed. Reddit users everywhere had in and out costs near zero; to make money, an active trader just had to get the direction right. You could argue that the odds were near 50/50 — a lot better than a trip to “Lost Wages,” where the everyday gambler still has to pay room and board.
Retail investors have also seized the chance to put their money into digital assets and investment vehicles, like cryptocurrencies and NFTs, both of which are underpinned by blockchain technology. This plunged investors into volatile waters — new markets where an Elon Musk tweet can crash prices or send them to the moon.
Novice investors need easy access to fundamental and regulatory information to make smart decisions on crypto, stocks or any other asset class. Robust investor education efforts from the financial industry will help promote positive outcomes for the growing ranks of retail investors and financial markets as a whole.
Retail Gets Bigger, Younger and More Tech-Savvy
This democratization trend is backed up by a Broadridge study of 20,000 households holding stocks, mutual funds and ETFs through intermediaries. The results were enriched by examining billions of data points generated by millions of investors’ activities from 2017 through the first half of 2020. The findings show that investing is becoming more democratic, and the investor community more diverse. More people are investing, they are starting younger and with fewer assets, and they are using new technologies to get started.
Market participation is expanding across categories and generations. It’s growing among millennials born from 1981 to 1996, and it’s growing among mass-market investors with investable assets under $100,000.
Signs of change are evident in the rise of upstart fintech firms such as Robinhood, Public, Stash and Acorn, which exist as smartphone apps rather than as marble-pillared Wall Street establishments. These fintechs offer free trading and fractional ownership of both stocks and cryptocurrencies and have been credited with ushering many new and young investors into the market.
Investors are enjoying this commission-free trading and, according to Broadridge
New Retail Investors and the Need for Education and Support
While the data for 2020 ran only through June, it’s fair to suppose that the events of the past year have accentuated these changes. While the future of digital currencies is unclear, younger investors’ willingness to embrace them (and to post about them on social media) reflects how investing has changed in recent years. Further, it suggests that investment practices will continue to evolve and become more appealing to a broader, more diverse audience.
Education and support must go hand in hand with this growth. It’s too easy for young investors to get pulled in by the promise of easy money. Platforms like Robinhood and Acorn offer the basics, but experienced investors and public companies can do more to help. Good advice has to meet these investors where they are — and that means platforms like Reddit and TikTok.
And while low fees are certainly attractive, investors sometimes get what they pay for. Some young investors still opt to work with wealth or asset managers. Having a knowledgeable, experienced guide to investing can be well worth the fee.
When stocks balloon and then pop for no apparent financial reason (as we saw recently with GameStop