Feb 21

Could Retail Investing Help Save the Post-Pandemic Economy?

Theo Normanton
Aug 3, 2020

Image: Marga Santoso on Unsplash

The coronavirus pandemic has brought about many cultural changes – from the ‘work-from-home revolution’ to the instigation of the regular Zoom quiz. Few of them, however, will have as big an impact on economies as the global shift towards retail investing.

It has been a good year for electronic trading platforms. In the last twelve months,  E-Trade, SoFi, Interactive Brokers, and TD Ameritrade among others all saw their number of new accounts double, while trading app Robinhood saw a staggering 3 million new accounts in the first quarter of 2020 alone.

These statistics testify to an unlikely phenomenon: a rush into the markets by first-time traders, even as the world braces for recession. The financial system is used to relying on cool-headed professional traders and impassive computers to see past the immediate repercussions of economic downturns and keep the markets rolling. The recent influx of rookie traders bringing their savings to the markets at a time of crisis is almost unprecedented.

Why now?

Research suggests that most of these signups are newcomers to trading, and a significant proportion of them are under 40 years old. This spike in opportunistic investment by millennials raises the question of whether the pandemic has re-shaped investing for good. Some commentators have gone as far as to suggest that retail investors are helping to prop up the markets as they continue their rally in spite of the blows dealt to the world economy by the coronavirus.

This claim is, of course, difficult to substantiate. And it’s equally difficult to pin down the exact reason why so many people are trying their hands at trading for the first time now, at what appears to be such an inopportune time.

Perhaps the sheer boredom of lockdown is driving isolated millennials with disposable incomes to seek some entertainment in the thrills of market fluctuation. This idea is reinforced by evidence that gamblers deprived of sporting fixtures to bet on during the pandemic are instead taking a punt on the markets. The boom could also be attributed to a drive towards saving instead of spending as the global economy prepares for the worst and consumption is hit by global lockdowns. As people seek more innovative ways to save their money, the option to invest seems increasingly attractive. Or maybe the phenomenon simply comes down to a speculative zeal as rookies spot an opportunity in this once-in-a-generation change in the market environment.

An international revolution?

Whatever the reason, retail investing is picking up speed impressively quickly, and has even developed something of its own subculture in different countries. In America, one of the more recognisable faces of the movement is Dave Portnoy, a sports blogger-turned-marketeer. He regularly gives his 1.7 million Twitter followers advice like ‘stocks only go up’, even though, by his own admission, he’s no expert: ‘Don’t trust anything I say about stocks’, his Twitter bio warns. And perhaps this is precisely why he has garnered so much public admiration – the figure of a newcomer with limited market knowledge hoping to make the most of a bad situation is one who lots of rookie traders can relate to.

In Russia, too, the market is enjoying a surge of first-time investors. Here though, the standard member of this new generation of traders looks less like the brash Mr Portnoy and more like an average citizen brought to investing by a combination of necessity and convenience. A new law says that interest on bank deposits of over $13,000 will be taxed at 13% in Russia. When you combine this with the range of relatively new platforms offering straightforward investment opportunities to novice traders, it’s easy to see why more and more Russians are moving some of their savings into stocks and shares.

The majority of Russian investors use brokerage platforms offered by digital bank Tinkoff or major banks VTB and Sberbank. But  competition seems to be heating up as other platforms gain traction – like Ozon.invest, a unique model which allows users to invest in the Russian online retailer’s partner businesses. Internet giant Yandex is also rumoured to have an investment platform on the horizon.

According to Andrei Braginsky, a spokesperson for the Moscow Exchange, the rise in retail investing comes down to “infrastructure and access.” He points out that trading “can all be done online, and so people who sat at home for the past three months are finding it very convenient to set up accounts and start investing. That was not the case just a few years ago.”

This mass migration into investment is having a particularly profound effect on markets in Russia. As raising capital from within Russia gets easier, more businesses are seeking listings on the Moscow Exchange. In a recent Forbes article, Alina Sychova, head of capital markets origination at Sova Capital, pointed out that “The explosion of retail activity and increase in domestic investors’ participation give companies an additional reason to seek a Moscow listing in pursuit of additional liquidity and lower volatility.”

UK trading platfroms are the latest beneficiaries of the rise in retail investing. AJ Bell announced in its quarterly trading update that retail investment sign-ups rose by 12% between April and June. Meanwhile, IG Group noted in its recent annual results that the number of trades taking place on its platform each day was one million this March, compared to just 336,000 a year earlier. But with Brexit looming and the British economic recovery from coronavirus lagging behind expectations, the spike in new investors would need to gather a lot of momentum to have the same buoying effect on the British economy as it appears to have had on others like China and Russia.

With more and more perks for the average investor, including the advent of fractional shares and zero commission, it seems unlikely that the new craze for retail investing is going anywhere soon. And having learnt the ropes during a historically volatile patch, it will be interesting to see what this new generation of part-time traders will do when markets become more predictable.

Theo Normanton

Theo Normanton covers tech, ESG and the circular economy, with a particular interest in the markets of Russia and the CIS.

Tweets at: @TheoNormanton

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