By Peet Serfontein
The rise of retail investors- Driving market transformation
Throughout history, major events have prompted a surge in retail investment where individuals actively trade assets by themselves, or outside traditional wealth management channels. These periods are often categorised by economic shocks, geopolitical disruptions and economic conditions that create excess disposable income, as well as technological innovations that lower barriers to entry. Over the last two decades commission-free trading apps and digital platforms have made markets more accessible to first- time investors. More recently, the "gamification" of trading as well as social media has also amplified and sustained the popularity of retail investing.
Covid-19: A catalyst for change
The Covid-19 pandemic was a watershed moment in history that exposed deep vulnerabilities in global systems, ranging from supply chains to healthcare, and compelled individuals, businesses and governments to reconsider systemic resilience, adaptability, and the role of technology in everyday life. Widespread "lockdowns" helped accelerate trends already underway such as digital adoption, remote work and online learning, and, crucially, democratising investments. Retail investment flourished in this disruptive environment, with the increase in retail participation continuing to accelerate ahead of institutional funds to this day.
Historical comparisons
There have been other catalysts of retail participation in the stock market over time. Notably, as the dot-com bubble was inflating in the late 1990s, retail investors flocked to tech stocks amid widespread enthusiasm over the internet revolution, helping stoke company valuations to overinflated levels and the subsequent sharp correction. While there are certainly similarities, the post- Covid-19 retail investing surge differs slightly - mainly due to better technology and social connectivity (trading apps, zero-fee platforms and online communities), which has amplified retail influence beyond previous cycles.
Interestingly, history suggests that major disruptive catalysts seem to emerge roughly every ten years, with triggers ranging from oil shocks and credit crises to currency collapses, technology bubbles and global health events.
Key impacts of retail investing
Liquidity and volatility
The surge of retail investors has increased volatility in small- to mid-cap equities as these traders, often coordinating through online platforms and social media, can quickly direct large amounts of capital into specific shares. This coordinated trading behaviour can trigger sudden rallies and equally sharp price corrections, sometimes disconnected from fundamentals, which can in turn affect market liquidity. The Game Stop short squeeze was a good example of how quickly and at what scale retail investors can now direct capital.
Expansion into alternative assets
Beyond traditional equities, retail interest in cryptocurrencies surged during the Covid-19 pandemic, with many attracted by the potential for outsized returns. This magnified the boom-and-bust cycle of digital assets, intensifying both the peaks of speculative rallies and the severity of downturns. Retail enthusiasm can therefore amplify volatility in existing and emerging asset classes.
Implications for institutions
Financial institutions such as brokers, exchanges, and trading platforms benefit from higher volumes brought on by mass retail trading, but at times face challenges in establishing price discovery, the process by which markets determine the fair value of assets. In such cases, asset prices reflect collective retail sentiment more than company earnings expectations, which can distort valuations and prompt professional investors to adjust their models and risk management approaches.
Regulatory response
Authorities have cited concerns about issues such as market fairness, investor protection and the influence of online speculation. Regulators have thus heightened their scrutiny, reviewing trading platforms practices, order execution transparency, and social media influence. The goal is to strike a balance between protecting new investors while ensuring markets remain transparent and efficient.
Important investor lessons
The rise of retail investing in the aftermath of global shocks highlights how these events can act as catalysts for lasting structural change in financial markets. Retail flows can have a significant impact on liquidity, volatility and other market dynamics, but they have also raised important questions around the long-term impact of heightened speculative behaviour. While accessibility to financial markets has democratised investing for a larger pool of participants, giving individuals more control over their financial futures, it has also revealed gaps in financial literacy.
Without a strong understanding of diversification, risk management and long-term strategy, new investors may be vulnerable to speculative trends and stand to lose significantly when these cycles change. Education, therefore, becomes a critical element in ensuring that the benefits of mass participation are sustained without undermining market stability, as the next wave of change inevitably unfolds.
