Retail stock trading has slowed since the height of the meme stock phenomenon in the first quarter of last year, but activity still remains above pre-pandemic levels and is expected to continue in 2022, according to a new research report.
“Interest rates remain historically low and inflation has spiked, which we think will cause investors to continue seeking higher-yielding assets such as stocks,” writes Tom Mason, Senior Research Analyst, S&P Global Market Intelligence.
Trends among Gen-Z investors show appetite for penny stocks like Sundial Growers (SNDL) and Camber Energy (CEI) and meme tokens like Dogecoin (DOGE). With a modest amount of money, they can buy more of them on the cheap.
"It seems, then, that some retail traders simply like penny stock trading, perhaps as a long-term, moon-shot investment or as a way of making bets on short-term price movements," reads the report.
While retail trading ballooned during the pandemic, the trend was in motion prior to 2020, says the report. This is because of zero commission fees and fractional shares offered by trading platforms like Charles Schwab (SCHW), Interactive Brokers (IBKR), and Robinhood (HOOD).
At the beginning of the pandemic, retail investors used the March 2020 sell-off as an opportunity to make money, says the research study.
“They were net buyers rather than panicked sellers,” wrote Mason, citing TD Ameritrade’s Investor Movement Index, which tracks retail investor sentiment.
“Overall, trading in meme-stocks remains high, but the potential for a seismic market event like the one in January 2021 seems less likely,” writes Mason.
One industry expert forecasts retail traders will move away from impulsive stock rallies and graduate into more sophisticated trading in 2022.
This new trend of retail investors managing their own portfolios — I do not think that goes away.Anthony Denier, CEO of Webull
“While I expect a reduction in the number of retail shares traded, options trading volumes will continue to be high and many retail traders will move to cryptocurrencies and categories like metaverse stocks,” Dan Raju, CEO of Tradier told Yahoo Finance.
Crypto regulation on the horizon
New rules surrounding investment platforms and crypto may influence the trend.
“I expect this will be the year of regulation, with new rules that will shape how brokerages service early stage, first time retail investors and adopt crypto,” said Raju.
“Retail investors see regulation as a good thing for crypto because it legitimizes the asset class, especially as institutional adoption increases,” he added.
Still, recent volatility and market sell-offs tend to reduce the number of trades from retail investors.
“When markets start going down on a daily basis, [and] we see corrections like we’ve seen, trading definitely slows down. It is a cyclical and seasonal business in that sense,” Anthony Denier, CEO of Webull tells Yahoo Finance.
“However, I do want to point out that this new trend of retail investors managing their own portfolios — I do not think that goes away. I think it’s only going to increase,” he said.
“I think the younger generation is very DIY, in terms of their own investing and own financing. I think they’re extremely savvy and know how to utilize the tools that are available, that weren’t available four or five years ago,"added Denier.
Ines is a markets reporter covering stocks from the floor of the New York Stock Exchange. Follow her on Twitter at @ines_ferre