2020 has been an unprecedented year in a myriad of ways, not the least of which has been the volatility and performance of the U.S. stock market. In March 2020, the DJIA saw one of its fastest declines on record and the CBOE’s Volatility Index, which measures the stock market's expectation of volatility, hit an all-time high. Even more remarkable was the subsequent market rebound, which over the span of five months saw the stock market retrace lost ground against a tide of record unemployment and widespread economic uncertainty.
Amidst this backdrop, the rise of the retail investor has generated sufficient impact that Wall Street, and corporate issuers, have taken notice. According to Bloomberg Intelligence, individual stock trading is at a decade high with retail trades currently estimated at 19.5% of all U.S. order flow (through June 2020), up from 10.1% in 2010 and 14.9% in 2019. Similarly, Citadel Securities, the top retail U.S. equity market maker executing 40% of all U.S.-listed retail volume, reports that individual market activity accounts for 20% of overall market activity on some days and up to 25% on days of heavy volume.
The surge in retail activity has been driven by a perfect storm of a bull market, pandemic-induced lockdowns, and extensive stimulus measures. These conditions created an ideal outlet for individuals bored at home as indoor activities, sports, and other entertainment and social options were put largely on hold due to the pandemic. Facilitating this boom in interest is the fact that the stock market has never been more accessible to individual investors. The brokerage business, driven by intense competition, has paved the way for the “democratization” of investing for years. In a race to capture new accounts, major online brokerages such as Schwab, Fidelity and E-Trade have steadily reduced barriers to trade, culminating in 2019 when Schwab announced $0 commissions – and competitors quickly followed suit. At the same time, the rise in popularity of millennial-friendly trading apps such as Robinhood and tastyworks found appeal among a whole new generation of investors.
Robinhood, whose tagline is “investing for everyone”, has become a poster child of retail investing – highlighting the ease at which novice investors can enter the investing fray. The firm, which first emerged in 2013, has grown rapidly, with the company disclosing in May that it had added 3 million new accounts year to date reaching a total of 13 million users. By comparison, Fidelity and Schwab reported 30.8 million and 12.3 million active brokerage accounts, respectively, in 2019. The Robinhood app allows investors to quickly open an account, and offers no minimum balance requirement, no commissions on trades, and the ability to purchase fractional shares. According to the company and CNBC, more than half of Robinhood’s new customers (median age 31) are opening their first brokerage account. As retail trading in general spiked this year, the media has fixated on Robinhood members whose day-trading tendencies and enthusiasm for complex trades have exhibited significant market influence at times. Debates are active regarding the potential pitfalls for many of these new investors, particularly the young, whose usage of these platforms often represents their first foray into the stock market.
While Robinhood investors have received the bulk of media attention this summer, it is prudent to keep in mind that the retail investor community is a diverse group – with varied strategies, horizons, and risk tolerance profiles. Collectively, however, this cohort has become increasingly active, sophisticated, and educated and it is likely they will remain an influential driver of market activity.WHAT DOES THIS MEAN FOR PUBLIC COMPANIES, PARTICULARLY SMALLER CAP ISSUERS?
Smaller cap companies, which are generally characterized by lower per share prices and higher volatility than their large cap counterparts, are inherently more attractive and accessible to retail investors who tend to view these attributes as providing greater prospects for generating outsized returns. Furthermore, due simply to their smaller size, these companies can be more susceptible to the collective impact of retail trading which may comprise a larger percentage of their overall shareholder base. Companies may experience some or all of the following:
Volatility can increase. Lately, it has been known as the “Robinhood effect”, meaning irrational movements in stocks driven by rapid-fire retail investing. These younger investors appear to thrive on the unpredictable and are therefore less likely to adopt a buy-and-hold strategy (although evidence suggests that the inverse can be true for the broader retail investing community). Data has shown these investors are active participants in options trading and short sales that can produce volatility in price and volume.
Share price can move on information that is not factual, regulated or sanctioned by the company. While plenty of individual investors pay close attention to earnings announcements, SEC filings, research reports and other official sources of information, others ignore this type of information and instead act on tips, trends and discussions they encounter on social media feeds and forums. These outlets encourage a herd mentality that is often informed more by speculation and rumors than business fundamentals.
Certain sectors may be more impacted than others. Novice investors tend to gravitate to products and services familiar to them, such as tech, gaming, and cannabis. Speculators seeking outsized gains have also been observed trading in the shares of financially distressed companies, with Hertz being a recent well-known example. After filing for Chapter 11 bankruptcy in May 2020, the company’s share price dramatically see-sawed in the ensuing months driven by Robinhood day traders. Their influence was so profound that the number of Robinhood holders had an inverse relationship to the shrinking Hertz share price as reported by The Wall Street Journal and Robintrack.net.
There has been a decided shift toward size amidst the uncertainty, and the pandemic may have accelerated the adoption of a new economy defined by contactless commerce, a greater dependency on remote access, and more at-home entertainment options; these emerging societal norms are manifest in large-cap technology stocks. The proliferation of ETFs has also influenced market dynamics by absorbing a larger percentage of the investing public’s dollars and mindshare. These ETFs, like mutual funds, have helped portion and package large securities into easily investable buckets that deliver varying rates of return. In addition, the significant growth rate of a handful of large-cap technology stocks (such as those mentioned above) certainly has had a disproportionate effect.SO WHAT, IF ANYTHING, CAN COMPANIES DO TO ENGAGE THIS COHORT?
Although it may seem like there is little a company can do to influence such a diverse group of individuals that make up the retail investor community (and perhaps it does not seem worth the time and effort to do so), we argue that companies can achieve a great deal, particularly by utilizing online resources and accessibility to constructively engage this group. For example:
Ensure your website remains an easy and reliable source of information. The value of a well-designed and well-populated website cannot be overstated. A company’s website is the base line resource for providing investors with the tools for information, interaction, and engagement. Ensure that the company’s website provides easy navigation to standard information such as company news and quarterly earnings announcements. An investor presentation should also be readily accessible to provide online visitors with an efficient overview of the company’s core business, strategy, and financial data. Information should be kept up-to-date, and content should be simple enough to easily tell the company’s story without overwhelming readers. To the extent that the company maintains a social media presence, monitor these outlets to have a sense of how the company is being perceived and discussed online to help tailor future messaging. It is also important that the website is mobile-friendly as younger investors may conduct investment research and execute trades from beginning to end on their mobile phones. Finally, make it easy for investors to stay engaged by providing options to subscribe to news alerts, submit questions via email, or call an IR representative (a specific person, rather than a general number, is preferred).
Engage creatively with (younger) investors. After confirming that the company’s website provides standard and expected information, focus on ways to creatively engage with your audiences, particularly a younger set of investors. Consider expanding beyond the traditional financial media outlets such as CNBC or The Wall Street Journal, to investment-oriented newsletters, respected financial bloggers, and other media outlets to capture a wider audience. Younger generations are also more comfortable, and may even prefer, receiving content in video format. Informational interviews with key executives, or a short video providing an overview of the company and its story can communicate information that may not otherwise be sought out (i.e. read) by certain potential investors. Additionally, making investor presentation webcasts available to all investors is helpful and demonstrates a company’s commitment to transparency.
Maintain solid ties with RIAs and brokers. Registered investment advisors (RIAs) and brokers also play an important role as a conduit between the company and retail investors. According to the Investment Adviser Association and National Regulatory Services, there are nearly 13,000 SEC-registered investment advisors who reported serving approximately 43 million advisory clients in 2019. FINRA reports 3,500 registered broker and broker/dealer firms in the U.S. in 2019. By actively engaging with these professionals – including making information easily accessible, answering questions, and hosting informational calls and meetings – it is much more likely that a positive and accurate image of your company is conveyed to a significant number of potential investors.
Do not overlook individual investors who reach out. Individual investors may reach out for reasons as benign as requests for the annual report, to questions about the business, or in other cases, to express unhappiness with the recent performance of the company or its shares. While it may be tempting to dismiss these inquiries and feedback, companies should develop a strategy to address these investors efficiently and competently. Preparing scripted responses to current topics and maintaining a detailed ‘FAQ’ section on the website to address standard inquiries are two such methods that companies should consider. From an investor and public relations perspective, the concern is that in this era where news spreads rapidly, compounded by social media, misunderstandings can go viral in an instant potentially resulting in negative publicity and causing material damage to a company’s reputation.WHAT IS THE LONG-TERM PROGNOSIS?
Looking ahead to a post COVID-19 world and a return to more normal times, it is difficult to predict whether the activity level, interest and behavior of individual investors, particularly the Robinhood cohort, will lessen or perhaps shift in other ways. However, trading innovation and information flow will only improve over time, and these forces are likely to drive further retail participation. It is also clear that a new generation of retail investors is on the horizon. Companies should proactively develop a game plan to understand and engage with this community in an efficient and positive way.
For additional insight on this topic, feel free to reach out to me anytime.