In the traditional remembrance, financial bubbles have often followed a similar trajectory: overzealous financial institutions, lax regulators and the inevitable tab to be picked up by taxpayers. Growing distrust in traditional investing methods and institutions has helped propel retail investment, investing done by nonprofessionals, to the forefront of the popular imagination. Though not bound by the same regulatory practices, it would seem that retail investors often fall for the same follies as those of Wall Street.
The retail investing community, by its very nature, is a broad church. Ranging from college students investing a few hundred, to retirees investing thousands; all that connects these groups is a faith in their own ability to invest. Traditionally a broker, a financial middleman, was required to access the major stock exchanges. With the digital age however, platforms such as Robinhood, or eToro have skyrocketed in popularity; Robinhood increased its user base by a factor of 10 to ~10 million active users between 2016 and 2023. Retail now accounts for 25% of trading activity, with 55% of that trading with amounts under 100,000$.
Similar to the realm of crypto, the rhetoric of financial independence and graspable riches has been a big draw to many people, especially the young. Unlike services such as Schwab, whose user base skews older and wealthier, the aforementioned newer services are typically dominated by young investors.
It may be for this reason that retail investors are so fond of risk. Call options, a riskier yet more (potentially) profitable type of trade, have seen a doubling in popularity, according to data from Mint, a market research outfit. Another related phenomenon has been that of so-called ‘meme stocks’. In what is now a well-documented event, a sound belief in the undervaluing of the GameStop and AMC stocks spiraled into a mass movement to invest in them. Driving the price from under a dollar to 80 USD in a matter of months. Though presented as a ‘quasi-Robin Hood-esque’ tale of sticking it to the man by some, it can best be described as a mass financial hysteria, in other words, a bubble.
A bubble is classically defined as a period in which a certain financial asset’s price skyrockets for any reason other than an increase in its actual price. Famous examples include the South Seas Trading Company in the 1700’s or the Netherlands Tulip Mania. Though retail investors have historically been a major cause of bubbles, they have also been the biggest victims of them. It is typically institutional investors, the very same entities that bubble promoters’ market themselves in opposition to, who see the writing on the wall and divest first. Although this is due in part to access to better information, the power that trends and social factors have on the retail sphere cannot be understated.
However, it is difficult to determine exactly what role retail investors play in the formation of bubbles, as opposed to simply participating in their enlargement. Research from The Journal of Banking and Finance has found that when retail investment in a market rises, volatility follows suit, a poor sign for market stability. Though the efficient pricing of assets in the market is predicated on the ‘wisdom of the crowd (given a large sample of semi-informed observers, a true estimation can be made), retail investors have been known to adopt a herd mentality. A report made by Harvard in tandem with the Shanghai Stock Exchange highlighted how once a bubble starts, retail investors play a major role in the inflation of the price, keeping the proverbial ball rolling.
Through social media, as well as just general observation, retail investors can act collectively, sometimes to the detriment of themselves. In financial markets, chaos begets further chaos. Many have attributed the current spike in ‘AI’-related assets such as Nvidia to popular sentiment over sound financial indicators. Though only 30% of Nvidia stocks are owned by non-institutional investors (a normal concentration), many attribute the rise of the stock to the very hype that guides the hands of many retail investors; many fears a bubble is forming that will almost certainly burn retail investors if and when it pops.
I was born in New York, but moved to Europe as a teenager. I am currently a second year BEMACS Student. I enjoy writing as a means by which to record and disseminate the things I find interesting such as politics, history and culture.
