Robinhood’s IPO and the Rise of the Individual Investor
Illustrating the popularity of retail investing, Robinhood Markets, Inc. (Tii:HOOD), a commission-free trading platform with more than 30 million users, went public on July 29. Demonstrating its philosophy to “democratize finance for all,” the company allocated more than a third of its shares to investors using its platform, allowing individuals to purchase shares directly – something virtually unheard of in an IPO.
Even though the financial services company’s shares declined more than 8% on its first day of trading, the millions of individual investors that make up its userbase represent a vast marketplace. A November 2020 survey by Harris Insights and Analytics, a market research and global consulting firm, found that 52% of those surveyed owned individual stocks through brokerage accounts, employee stock purchase plans, or direct stock purchase plans sponsored by individual companies. This represents more than 130 million individual investors in the U.S. alone. The survey also notes that these individuals hold a total of $10.6 trillion in leading online and discount brokerage accounts.
Individual investing and online brokerages are not new concepts. In 1995, E*Trade, the first online brokerage firm, derived more than 80% of its revenues from trading commissions. However, the growth rate for retail investors has accelerated in recent years as consumers look to take their financial future into their own hands. A 2021 survey by Charles Schwab found that 15% of all current U.S. stock market investors say they first began investing in 2020. Designated “Generation Investor,” these individuals vary in age, race and income but were drawn to the financial markets due to lower trading costs, easy-to-use new products and services, and greater accessibility.
These individual investors certainly made their presence felt last year – in a big way. Shares of GameStop Corp. (Tii:GME), AMC Entertainment Holdings, Inc. (Tii:AMC) and other heavily shorted stocks surged despite a lackluster outlook as Reddit users famously bought up the stocks, bedeviling the hedge funds that were banking on continued declines. Similarly, Hertz Global Holdings, Inc. (Tii:HTZZ) shares rallied after the company filed for Chapter 11 bankruptcy as individual investors took positions contrary to the “market experts.”
And it’s not just the beleaguered companies impacted by the rise of the individual investor. The Harris Poll cited earlier indicated 80% of those surveyed said they are at least somewhat likely to purchase products of the brands in their portfolios. Uncoincidentally, companies with strong consumer brands like Amazon.com, Inc. (Tii:AMZN), Apple Inc. (Tii:AAPL), and Starbucks Corporation (Tii:SBUX) have also benefited from individuals buying shares of the companies with products they enjoy.
Still going strong after more than 25 years, the retail investor growth trajectory shows no sign of flattening out. The plethora of easy-to-use tools, an abundance of readily available information, increasing desire to create and control one’s own portfolio and user-friendly brokerage platforms indicate the rise of the individual investor will continue for the foreseeable future.