Technology’s Impact On The Evolving Landscape Of Retail Investing

Millions of rookie retail investors have taken an unexpected interest in stock trading in the last two years, so much so that the question “what is the stock market?” was a trending Google search term during the first quarter of 2020.

There are several reasons why so many people are now embracing stock investing. The COVID-19 pandemic, which disrupted markets in March 2020, undoubtedly contributed to the spike in interest as people suddenly found themselves with a lot of free time and some extra cash.

The GameStop (GME) trading saga that kicked off a price war on stock trading app Robinhood also caused a surge in new retail investors dabbling in markets. No one expected an army of amateur traders to cause GME stock to rise more than 900% in less than a month.

Altogether, these trends precipitated some extraordinary trading activity by retail investors spurred by the accessibility facilitated by technology. The impact of technology on the retail investing landscape is undeniable, and it’s largely thanks to the prevalence of easy-to-use investing apps that helped fuel the retail investing frenzy.

Of course, user-friendly digital trading platforms aren’t the only thing technology is transforming in the retail investing landscape. Below we take a look at five ways technology has impacted retail investing.

5 Effects Of Technology On Retail Investing

1. A new breed of retail investors

The investor profile of the individual investor has evolved significantly over the last decade — all thanks to technology.

Technology has created an entirely new class of individual investors with distinctive characteristics. These investors are younger, more racially diverse, and, most notably, they have smaller account balances. Anyone, even novice investors with limited discretionary income, can now have a globally diversified investment portfolio.

Digital trading platforms have made investing accessible to people who previously didn’t have enough capital to participate in financial markets. A recent report from the Financial Industry Regulatory Authority (FINRA) found that approximately a third of new investors who opened a brokerage account in 2020 had balances of less than $500.

2. Growth of online trading platforms

A big reason for the retail investing boom is the growth of digital trading platforms that offer no-minimum investment accounts along with zero-commission trading. Whether you prefer stocks or crypto, there are trading platforms of any choice.

Online retail brokers reported elevated app downloads in the wake of the GameStop trading saga. For example, downloads for stock trading app Robinhood reportedly topped 2.1 million in February 2021 — a 55% increase from 2020.

The value of the global market for online trading platforms has also experienced healthy growth since 2020. According to a report on Statista, the market was valued at $8.28 billion in 2020 and is projected to reach $11.73 billion by 2027.

3. Easy access to global markets

Technology provides easy access to self-service, commission-free trading platforms with products from numerous investment areas, including crypto trading, options trading, margin trading, and more. Gone are the days when new investors had to jump through hoops to access financial markets.

The accessibility of global financial markets has not only facilitated greater adoption but also spurred time-agnostic trading. It is now possible to trade from anywhere and at any time using apps that weave together all global stock exchanges in a user-friendly format.

4. More security and regulation

The rise of retail investing has forced regulators to take a closer look at the bludgeoning industry and determine whether more regulation is required to protect retail investors who are placing big bets without fully understanding the risks involved.

FINRA is reportedly planning to beef up rules for options trading in response to concerns raised by the U.S. Securities and Exchange Commission (SEC) and others in the aftermath of the GameStop saga. The regulatory agency has reportedly flagged several risks related to services offered by digital trading platforms.

Potential rule changes by FINRA may include expanding the approval process for individual accounts that want to trade options contracts. Options trading experienced a 35% increase in 2021, with an estimated 39 million contracts traded, compared to about 29.5 million contracts in 2020, according to Options Clearing House.

Both FINRA and the SEC plan to examine whether broker-dealers are acting in the best interest of their clients and providing investment opportunities that are appropriate given their customers’ experience level, financial situation, risk tolerance, and age, among other factors.

5. Rise of social or copy trading

Social media has played a big role in boosting new investors’ collective knowledge as well as providing a forum for novice retail investors to share and hone their investing strategies.

Many of these new investors rely on social media to receive and process information as well as make investment decisions. They shun conventional wisdom, and as a result, it isn’t uncommon to see them participate in unusual trading activities without consulting financial professionals.

A 2020 FINRA report found that a majority of new investors who opened their first brokerage account in 2020 don’t seek advice from financial professionals. Many new investors instead participate in copy trading — an investment strategy that involves copying the positions.

Copy trading isn’t a new idea — it developed in 2005 from algorithmic trading. Traders used  automated trading software to share their investment history so that others could follow.

Online trading platforms have helped to popularise copy trading by providing users with the option to follow influential traders and automatically copy their investment portfolios. It may not be right for everybody, but it’s a great way for beginners to learn the ropes.

The technology revolution is just starting

It’s impossible to ignore the new crop of retail investors who are leveraging technology to access global capital markets. The influence they exerted on the market in 2021 will likely persist into the future and alter traditional market dynamics.

Technology will continue to enhance the quality of products that are available to individual investors and provide features on par with those that have historically only been available to large financial institutions.

Millennials and Gen Z traders will be most positively impacted by the changes brought by technology to retail markets. Adapting to this shift is critical for financial institutions to continue serving the needs of their customers in the ever-evolving landscape of retail investing.