It goes without saying that 2020 will be one for the history books.
Record-breaking job losses, record-breaking economic downturn – and let’s not forget the worst pandemic in more than 100 years.
But 2020 is setting another new record: in stocks. And no, not just the massive run-up in the Nasdaq and the S&P 500. The ongoing proliferation of “easy-access” investment platforms has made buying stocks something you can do with your thumbs during your lunch break. Robinhood is at the head of this pack.
Due to this trend, 2020 has set a new record for the volume of stocks individual investors have traded. So far this year, individuals executed over 20% of stock trades, compared to just over 10% in 2019.
Part of the growth stems from the reality of the year itself. From February into mid-March, global stocks fell by about 30% on average. After that type of impact, perhaps it’s not shocking that institutional investors are less active than usual.
But retail investors haven’t been shy about being in the market, with trades per investor showing an increase over 2019 as well.
From a Maganomics perspective, this is exactly as it should be. People make money when prices change. U.S. stocks dropped by 35% from peak to trough in March. Since then, they have not only recovered what they lost, but both the Nasdaq and S&P 500 have risen to all-time highs. The Dow Jones Industrial Average isn’t far behind.
With that type of price movement, retail investors actively investing is what we’d hope to see. Investors can make money whether stock prices are going up or down, by taking either short or long positions. Although, in reality, most retail investors only buy stocks; few have the skill or inclination to short sell (attempt to profit from a falling share price).
With “Joe Investor” rather than institutional investors now trading 1 in 5 shares, that’s notable. Retail investors tend to follow longer-term, buy-and-hold investment strategies.
But now that day trading is so easy to do on mobile apps, the higher participation of retail investors in the market is a trend we expect to continue – as long as stocks move higher.
If the market turns lower again, it could be a different story. In March, many retail investors stayed in the market and bought more stocks as it rebounded higher. There’s no guarantee they’ll act the same way again.
In which case, the market could fall further and faster… and the recovery would likely take much, much longer.