The Power of the Retail Investor

Investors Insights
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The retail investor is powerful. This belief has been core to my philosophy in building EquityZen. According to a recent study by JPMorgan, retail trading reached an all-time high in 2023, accounting for 23% of all trading volume – proving that the power of the retail investor is more than just the meme stock frenzy. The buzz about Reddit’s upcoming IPO reminds us of the power that comes when retail investors work collectively. Furthermore, despite fears of a recession, median net worth surged 37% in 20221 showing record growth. With this growth in wealth we’ve seen increased participation in the stock market. So what does this all mean? Here I unpack what this shift means for both public and private markets and the opportunities it presents.

 

A Growing Retail Market

Macro trends, like the broader market, move in cycles. At this moment, the broader trend of “technologification” has driven retail participation in investing. Retail investors have been beneficiaries of several fintech trends, from fractional shares to mobile brokerages and socially-driven investment communities like Reddit that have led hoards to invest driven by “FOMO”. These once-new technologies have lowered the barriers to entry, making investing easier than ever, driving adoption. As a result, more families than ever directly own stock. In fact, direct stock ownership has grown from 15 to 21%, the largest change on record. So not only are retail investors investing in stocks more broadly (which 58% of families do), one in five are actively picking individual stocks. As the meme stock frenzy showed, these individual investors have the power to move markets, and both public and private companies are taking note. 

Successful retail and e-commerce brands have learned to listen to the voice of consumers and create products that resonate, especially as consumers openly share more information than ever before. This shift impacts those brands’ bottom lines. Research has shown that customers who feel connected to brands, are much more likely to increase their spend with that brand and 75% more likely to buy from them over a competitor. Similarly, public companies are realizing the need to address the concerns raised by retail investors. Afterall, these investors have the ability to boycott or short certain stocks and vote with their dollars just like they do when purchasing a product or service. While this may lead some retail investors to boycott investments in certain companies they are morally, or otherwise, opposed to like “vice” investments, other retail investors may be the very bettors who support those companies, allowing them to reap gains. 

All in all, public companies are highly susceptible to the power of the retail investors, 47% of whom want to be “more involved” in the companies they invest in and 58% voting their proxies to make their voices heard. In aggregate, these retail investors can move markets, exemplified by the $15.6B in outflows they drove in October of 2023 alone. Public companies have a spotlight on their stock price, and are notorious for being short-term focused. Few firms have the power to sway public opinion, so most have to listen to public sentiment, and connection is the new currency. Thirty-four percent of retail investors have made a change to their investments as a result of content seen on social media. The ability for public companies to control, or at least participate, in the social media-led conversations that are driving trading activity in their stock in an authentic and trustworthy way has become more important than ever. While a company like Gamestop couldn’t control the 1.6 million tweets that helped drive the meme-stock frenzy in 2021, they learned the importance of keeping a pulse on retail investor sentiment and this means paying attention to social media. 

 


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Retail influence in the private markets

When it comes to private companies, for better or worse, retail investors cannot exert the same influence that they can on public companies. Perhaps the biggest reason is that access to private markets has historically been limited to primarily institutional investors. Platforms like EquityZen have broadened that access, but access is still only available to accredited investors, and not what is generally considered a “retail investor.” Given that less than 20% of U.S. households are considered accredited investors, the pool of retail influence is vastly smaller than it is for public markets. Another reason is there isn’t a publicly published stock price in the private markets. This means that even for investors who can act, the lack of price and financial metric transparency gives them less real-time information to act on. Finally, you can’t short private companies. So while private market investors can direct their capital to companies they believe in, they can’t actively benefit from the depreciation of those they don’t.

While the lines are blurring between public and private companies as companies stay private longer, certain differences will remain when it comes to retail investor influence. That doesn’t mean, however, that retail investors cannot be a force to be reckoned with in private markets. Private companies with consumer-facing brands can easily find themselves catering to retail investor sentiment, because it is also the sentiment of their customers. There is also a teeming secondary market that did not exist a decade ago when EquityZen launched, changing the dynamics for private companies. Retail participation in this market is driving more price efficiency, simply as more trades take place. Furthermore, retail investors are voting with their dollars and even their indications of interest are helping create a more holistic view of investor sentiment. This data is crucial, especially for companies preparing to go public as it gives a sense of retail sentiment in a market that historically has only reflected institutional interest.

With the proliferation of private markets, private companies will need to become more attuned to retail investor sentiment earlier, much like their public counterparts. After all, today’s private companies hope to be tomorrow’s public companies. Therefore, the more mature and “IPO ready” a private company is, the more they must be prepared for the impact of retail interest on their growth trajectory and success in the public markets. As the private markets grow, retail investors have more opportunities to support their favorite brands, not only by using them and being evangelists of them, but also by investing in them. They no longer have to cheer from the sidelines. This economic alignment creates the opportunity for a stronger bond and loyalty to these brands, which can see itself expand as these companies go public.

While retail investors hold much more influence in the public markets than in the private markets, this is starting to change as more accredited investors gain access to private market investments. This will ultimately change the power dynamics in a market where private companies and institutions have historically held the cards. As the retail participation continues to grow and social media-driven investing solidifies itself as more than a trend, private companies eyeing an IPO will be wise to consider retail investors when planning their roadshows and longer term public market plans. You see this with Reddit making the decision to allocate IPO shares to 75,000 of its power users, many of whom were powerful voices in the retail investment movement, in its upcoming IPO. All in all, this is good for the market. The more voices that are represented, the more efficient and democratic a market can be, and that’s something I firmly believe in. As the next wave of private companies prepares to IPO, I’ll be keenly watching how retail investors respond. They have the power to move markets and will continue to.

 

Sources

1. Federal Reserve, Evidence from the Survey of Consumer Finances, 2023

 


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