Global fintech and funding innovation ecosystem

Stop Calling Them ‘Dumb Money’: Retail Investors Are Revolutionizing the Stock Market

CATO Institute | Jennifer J. Schulp | Jan 4, 2020

Retail investors - Stop Calling Them 'Dumb Money':  Retail Investors Are Revolutionizing the Stock MarketAre you “dumb money?” I am. You probably are too. Wall Street institutions — so‐​called “smart money” — usually throw around the phrase to describe investment activity they don’t like. And by “dumb money,” they usually mean individual, or “retail,” investors.

Retail investors are big news these days. Retail trading has surged, buoyed by apps, zero‐​commission trading accounts, and, some argue, limited entertainment options during the COVID pandemic. Wall Street has been griping about how “dumb money” upsets the market’s balance, bringing volatility and overinflated prices. And others are voicing concerns that retail investors cannot understand investment risks and will hurt themselves. Both have led to calls, heard by the SEC, for more regulation of retail investor market access.

But placing obstacles to market access for retail investors is a mistake. Retail investors are important participants in our markets, and lowered barriers to their participation should be celebrated. No matter who calls them “dumb money,” retail investors deserve the freedom to make their own trading and investment decisions.

“Dumb money” isn’t so dumb after all

First, let’s put the term “dumb money” to rest. It’s insulting and invites criticism about retail participation in the markets. It also implies a homogeneity to retail investing behavior that does not exist.

Retail investors should be recognized as important market participants. Like their institutional counterparts, retail investors provide market liquidity and can learn how to invest in real estate, too. The fact that retail investors behave differently from institutional ones, and sometimes behave differently from each other — far from being a bad thing —can be valuable in times of market stress. Having diverse strategies represented in the market can cabin wild market movements by decreasing herd behavior and allowing better matching of buyers and sellers.

See:  5 Drivers Behind the Sustainable Investing Shift

Wall Street institutions complain that retail investors cause irrational market swings, but this claim doesn’t hold up. Although approximately 38% of total U.S. equities are held by households, retail stock trading rarely moves the market. Most retail trades are too small, and individual decision‐​making results in diverse trading strategies.

Of course, there are exceptions. Those exceptions — like recent retail investment in Hertz and Kodak — tend to make headlines because they are unusual. On the whole, Wall Street should question its views, not amp up its criticism.

For instance, retail investing was much wiser in 2020. Non‐​institutional investors nailed the market bottom according to Societe Generale and generated better performance than a lot of hedge funds according to Goldman Sachs.

Retail investing is growing, but not overwhelming 

Approximately 20% of market trading volume is now attributable to retail orders. This trading volume is a substantial increase over 2019, but retail’s growing market presence is not new. From discount brokers in the 1970s to online trading in the 1990s, retail investors have flowed into the market whenever barriers to their access have decreased.


The adoption of zero‐​commission trading accounts by mainstream brokerages in late 2019 — following Robinhood’s commission‐​free trading model — is widely viewed as sparking the retail investor boom, but other changes have also contributed. Tweaks to trading platforms such as fractional share trading, lowered account minimums, and app‐​based trading interfaces have all opened up retail trading.

These changes should be applauded for making it easier to invest with smaller amounts of capital. Although approximately 53% of households held stock in 2019, according to the Federal Reserve’s Survey of Consumer Finances, stock ownership is strongly correlated with household income, education, age, and race.

Continue to the full article --> here


NCFA Jan 2018 resize - Stop Calling Them 'Dumb Money':  Retail Investors Are Revolutionizing the Stock MarketThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit:

Latest news - Stop Calling Them 'Dumb Money':  Retail Investors Are Revolutionizing the Stock MarketFF Logo 400 v3 - Stop Calling Them 'Dumb Money':  Retail Investors Are Revolutionizing the Stock Marketcommunity social impact - Stop Calling Them 'Dumb Money':  Retail Investors Are Revolutionizing the Stock Market

Support NCFA by Following us on Twitter!

NCFA Sign up for our newsletter - Stop Calling Them 'Dumb Money':  Retail Investors Are Revolutionizing the Stock Market


Leave a Reply

Your email address will not be published. Required fields are marked *

5 − 3 =