Attracting and managing retail investors
The increasing complexity of picking which assets to own has put both asset managers, especially securities dealers and investors under pressure in the global capital market. It has plunged the concept of sustainable investing into the beginning of a backlash. A definitive Survey of 750 institutional investors and 10,000 retail investors by PwC Global in 2017-2021 entitled: “Asset and wealth management revolution: Investor Perspectives – Rethinking purpose and performance” is revealing. Retail investors are now more concerned about how their capital is handled by asset managers. They are taking more than passing interest in social responsibility and other non-financial aspects of investing. They are scrutinizing operations of firms with special attention to cost and efficiency. They are directing their lens to ascertain asset managers’ ability to generate Alpha returns. The Survey culminated into PwC’s creation of the Investor Alignment Index which measures the gap between investor expectation and asset managers’ performance. This brought into fore, the extent to which investors place premium on macroeconomic and political environment than expected return. This is no rocket science as the character of an operating environment will ultimately determine risk-return trade off.
By characterization, a retail investor is an individual who buys and sells stocks through a professional securities dealer. But in the current age of digitization, some retail investors execute their trades through online brokerage platforms or other investment accounts. Although Institutional investors determine the direction of the market as they control significant holdings, there are growing impacts of retail investors in equity markets. They deploy social media platforms to monitor and coordinate their portfolio strategies. Retail investors like institutional ones also fuel a rise in trading volumes. Smart ones among them use leverage to speculate on individual companies while those in the market where derivatives are traded hedge with call and put options. This strategy pays off when the price of the underlying asset rises or falls.
High net worth retail investors channel their transactions through brokerage accounts, and this makes it easy for them to take leverage in the form of margin. In advanced economies such as the United States, equity culture is widespread while retail investor presence is substantial. For instance, Russell 3000 US News & World Report says retail investors account for 10 percent of daily trading on the wide-ranging U. S. stocks index. Retail investors’ debt in the United States was an inflation-adjusted $750 billion last year, the highest level since 1997. Early this year, the surge in trading volumes for call options on both small and large stocks in the United States was attributed to the activities of retail investors. On The Nigerian Exchange Limited ( NGX), participation of retail investors is on a sustained upswing as technology has further democratized trading processes, making the market more appealing to millennial. For instance, last year, retail investors contributed 29 percent to equity transactions. The NGX has continued to put investor education on the front burner to grow its shareholder base, where retail investor’s account for about 3 million, in a population of 200 million. Investor Education in Nigeria is strongly reinforced by the Chartered Institute of stockbrokers (CIS) and the Association of Securities Dealing Housed of Nigeria (ASHON).
The latest in the series of strategies by NGX to attract retail investors was the Webinar powered last month, themed: “ Sukuk and Green Bonds: More than Just Investing”. In the same vein, only last week, NGX launched its enhanced version of X-Mobile which the Chief Executive Officer, TemiPopoola said “would enable capital market players and potential investors to have requisite resources to engage more with the market. The App which was first introduced in 2019 is designed to provide “market participants, especially retail investors, with convenient, faster and real- time access to information about NGX, its listed securities and Trading License Holders”. The Securities and Exchange Commission (SEC) has always decried low participation of retail investors in the market. But the Commission should also come up with more innovative ways to attract retail investors into the market. However, attracting investors generally is not a tea party in the global world. Enlightened individual and corporate investors are not swayed by the loaded curriculum of investor education programmes, media hype of mouth-watering return on investment from the market and deployment of modern technology among others. There are fundamental issues which they consider too sacrosanct to ignore before final decision to invest in the capital market. They are worried because of perceived lack of transparency, price manipulation, inadequate disclosure of companies, insider trading, fears of takeovers and mergers of quoted companies, problems of trade settlement mechanism and handling of investor grievances. These issues should be addressed frontally by securities markets across the globe and communicated through investor education to secure investor confidence.
Enlightened individual and corporate investors are not swayed by the loaded curriculum of investor education programmes, media hype of mouth-watering return on investment from the market and deployment of modern technology among others
Retail investors have their feat of clay. Many low net worth retail investors, especially in the emerging markets have no investment objectives just as they lack basic knowledge of risk tolerance and time horizon. This class of retail investors do not usually seek professional advice from securities dealers. They often play the capital market in the short term and expose themselves to all forms of investment risks, including mismatch-by obtaining short term loans to invest in long term assets as a gateway to becoming instant millionaires. In Nigeria, some retail investors had lost their bulk gratuity to the market due to expectation of exponential returns. The stock market is not an avenue for Ponzi schemes where investors are swindled by promises of huge returns with zero risk. It is an organized market and a proxy for a perfect market in economics. The market is highly regulated to build investor trust. Securities dealers that cajole an investor with assurances of huge returns will lose their trading license. They can only offer investment advice based on available information. Low net worth retail investors do not understand that the quantity of one’s investment determines the return. This partly explains why they often shun dividends before the era of electronic payment. They dominate the list of unclaimed dividends today. Accounts of low net worth retail investors are the most difficult to manage by dealing with member firms due to the burden of irrelevant questions and unrealistic expectations. Such accounts ironically generate the least returns for the houses. Experience has shown that investors with insignificant volume of shares are the loudest voices at companies’ Annual General Meeting (AGM). A few of them actually put the management of companies on their toes in the areas of corporate governance. But it is a game of empty vessels that makes the loudest noise. The bulk of low net worth ones indulge in a buy and hold attitude and always await announcement of dividend. Not until the regulators moderated some of their excesses in Nigeria, low net worth retail investors expect quoted companies to give them gifts at every AGM, exclusive of their meagre dividend. But every market needs retail investors. They are necessary evil. The high net worth among them are more active in speculation and in a way provide liquidity. Retail investors generally boost shareholder base. This is the psychology of retail investors. Capital market regulators and operators should continue to evolve more innovative strategies to attract retail investors into the securities market.
Oni, a communication consultant, chartered stockbroker and commodity broker, is chief executive officer, Sofunix Investment and communications