A record number of new investors rushed the markets last year, a new report says, armed with investment platforms like Robinhood and poised to take advantage of volatility.
While retail investors have traditionally participated in the stock market through their 401(k)s or other employer-sponsored retirement accounts, recent investors have taken matters into their own hands with new trading platforms, according to a report this week from the FINRA Investor Education Foundation and NORC at the University of Chicago. About 1,300 households were surveyed last year, between Oct. 26 and Nov. 13.
The study confirms what Wall Street has been walloped with in the past couple weeks: About 38% of respondents were new investors who opened up investing accounts for the first time, as retail investors make up more and more of the stock market.
Last year, Citadel Securities told Bloomberg that retail traders make up “a fifth of stock-market trading and as much as a quarter on the most active days.” That’s likely to have gone up more this year, now that more of Main Street has learned about fintech brokerages.
Day traders coordinating trades on Reddit pushed stocks for GameStop and other so-called “meme stocks” to extraordinary new highs. Thursday’s crash in the GameStop rally, down 42% to under $54 per share, also highlighted the extraordinary danger in the markets for amateur investors.
Who are the new retail investors? They’re younger, under 45; they’re more diverse. They like to go to friends and family for investment advice. And they’re using money from their paychecks or their savings.
They also really want to save for retirement. Asked why they opened a new investment account for the first time last year, the top reason was saving for old age, from about 17% of respondents. The second reason? The ability to start with smaller amounts of money, about 16%. At the bottom of the list of reasons: Extra time (2%), zero commission trades (2%), and advertisements (1%).
Breaking down responses by race reveals even more differences: Among new white and Asian investors, the top reason for opening a new account in 2020 was saving for retirement. Among new Black and Latino investors, the ability to invest with small amounts was the top driver.
When asked how they make investing decisions, 38% of new investors said they asked their friends, colleagues, and family for their stock picks, followed by 37% of new investors who said they consulted the companies’ websites.
That’s a major difference from more experienced investors. People who owned accounts prior to 2020 said they turned to “personal research,” as well as information from company websites, brokerages, and other financial services companies, first before making any trades. Notably, regulators were the least frequently used information source among new and experienced investors.
New investors also know they do not have the best financial savvy. Not only did they self-report that they have “low/very low” investment knowledge, they scored the lowest compared to more experienced investors when presented with a simple test of five questions. These included: What is a stock? And how to calculate the value of a call options?
For new investors, analysts wrote, that low score could mean they are “potentially unprepared to make sound investment decisions in their new accounts.”
Still, they continued, new investors’ accurate self-assessment of their own abilities may mean that they are more likely to seek out better information.