The rise of the retail investor

June 20, 2024

By Troye Brady, Aprio Investor Relations

The South African stock market has witnessed a rise in retail investor participation in recent years. This seems almost counter-intuitive, given high interest rates and the higher cost of living, which presumably cuts back on people’s disposable income. However, trading platforms such as Easy Equities have made it easier for people to trade and the introduction of investment products such as exchange-traded funds (ETFs) and fractional share trading, have given investors more choices to build portfolios which suit their needs.

The retail investor market is particularly important for small- and mid-cap companies, where liquidity is often a problem (eg free-float of perhaps 20% or less). The investment mandates of big and even medium-sized institutional funds often prevent them from investing in those companies. But that is exactly where the retail market fills a much-needed gap

The presence of retail investors can enhance liquidity and help to establish “fair value” of a company. However, it may also increase volatility, due to less access to quality research and more emotional investment. Retail investors often lack the experience and expertise of institutional investors, and may be susceptible to herd mentality, leading to exaggerated price fluctuations, which are detached from fundamentals.

We have noticed a shift in demographics, where historically the retail investor market was dominated by retired wealthy individuals, nowadays it is represented more and more by rising middle-income and younger people. This is very important as the younger generation uses more modern ways of communicating and keeping themselves informed, such as social media and digital platforms.

Social media platforms can encourage speculative and impulsive trading decisions. Individuals may succumb to the allure of quick profits or the so-called “fear of missing out”. The use of social media and online forums can also result in the spread of false claims and misinformation, making it harder for retail investors to make informed decisions.

As investor relations specialists, we therefore have a responsibility to use and create forums where the retail market can get access to company management and/or first-hand quality information. We need to educate our clients (the listed companies) to respect and acknowledge the importance of the retail market. It is one of the easiest markets to communicate with, due to its thirst for access to quality information. Companies should therefore make it a part of their IR programs to engage with the retail market through virtual investor platforms.

The JSE provides “Small-Cap” investor forums, where companies can do short introductory presentations about themselves and various private wealth institutions offer similar forums. Even doing a simple YouTube webcast can help to inform the retail investor audience. At Aprio IR, we keep track of all these various forums and can assist with getting your company engaged with the retail market.