With new retail investors pouring into trading, Ben Ashwell looks at whether these new shareholders are driving price change, volume and proxy voting – and where they’re getting their information
The world of retail investing has changed dramatically in the last year. From commission-free trading and consolidation to market crashes and online message boards, retail investors today inhabit a brave new world.
In the space of seven days in October 2019, TD Ameritrade, E*Trade, Charles Schwab and Fidelity all announced that they were removing commissions on stock and ETF trading – following the lead of Robinhood, which has been allowing its users to trade commission-free for many years. The following month, Charles Schwab announced its plans to acquire TD Ameritrade for $26 bn. Then in February 2020 Morgan Stanley said it had struck a deal to acquire E*Trade for $13 bn, a deal recently approved by shareholders.
As the Covid-19 outbreak sped up, global stocks experienced an average drop of 25 percent in March, according to data from Goldman Sachs. Shelter-in-place measures were enforced, unemployment levels skyrocketed and institutional investors set new records for the amount of cash they had on hand, according to Bank of America Merrill Lynch’s fund manager survey.
In the space of six months, barriers to entry for retail investors fell, the cost of trading disappeared and millions of people were forced to sit at home, unemployed or furloughed. According to TD Ameritrade, 608,000 retail investors opened new accounts in the quarter ending March 31; two thirds of those accounts opened in March.
Charles Schwab reported 609,000 new accounts in the same quarter, while E*Trade said 90 percent of its 363,000 new accounts were from retail investors. And Robinhood trumped all competition, recording 3 mn new accounts in the first three months of 2020. The pattern is mirrored in other parts of the world, too: UK-based Freetrade reports a 90 percent increase in new accounts since March and Australian platform Stake says new users have doubled.
Many platforms have expanded their product offering in recent years, enabling retail investors to buy into ETFs, participate in options trading and execute more complicated buy and sell actions. With these more complex investing tools at their fingertips, retail investors account for 20 percent-25 percent of daily market activity, according to Citadel Securities – at least double their activity in 2019.
Regulatory concern This is enough to concern SEC chair Jay Clayton. ‘We’re seeing significant inflows from retail investors who conduct more trading than investing,’ he told CNBC in late July. ‘I encourage people to educate themselves, but short-term trading is more risky than long-term investing and I do worry about the risks investors take.’
Clayton was speaking a month after Alexander Kearns, a 20-year-old student, committed suicide when the Robinhood app showed he had a negative balance of $730,000. Kearns was trading options and was reportedly misled by the app displaying only half the trade, due to a lag in its processing of the deal. The co-founders of Robinhood wrote on the company’s blog that they were ‘personally devastated’ and committed to a series of changes in the app in recognition of their ‘profound responsibility’.
Robert Jackson, who left his post as an SEC commissioner in February 2020 to return to NYU Law School, shares Clayton’s concerns. ‘I would love for people to feel about the market the way my parents felt when they invested years ago in a way that enabled me to go to college,’ he said during remarks at a Berkeley Law School event in June.
‘The [perception] that the markets are a casino or a game… worries me about the long-term future of young people in particular.’
But does any of this change the nature of IR? Significant retail trading can have an effect on volatility, certainly, but for most public companies, retail shareholders represent a small percentage of the investor base – and a remote, disparate community to communicate with. Retail holders and the share price Christopher Blake, director of research and analysis at IHS Markit, dug into the numbers during June and July. He found that retail investors have been much more active during the last year, starting in October 2019 when commission-free trading became virtually ubiquitous. Trading increased again following the Covid-19 outbreak, but October’s uptick hints that retail investor activity predates the pandemic and could therefore outlast it.
While retail investor trading has increased, Blake notes that it’s relative to the market’s increase in general trading activity, so retail investors are trading more than they were last year, but so are hedge funds and institutional investors. ‘We wanted to look at how retail investors are accounting for volume,’ he says. ‘Our data shows they are more active, but we don’t suspect they’re having an outsized impact because they’re doing this when everyone else is more active.’
Blake did observe, however, that retail investors are increasing their ownership of companies. Looking specifically at Robinhood accounts at a handful of public companies, he says ownership increased from 0.05 percent to 0.2 percent during the last year. While that’s still a very small percentage of overall ownership, it’s a fourfold increase in Robinhood users.
‘There’s a slight bias toward buying, not selling: we would expect ownership levels to stay flat if there was equal buying and selling,’ says Blake. ‘On average, retail investors are more likely buyers than sellers. There’s no question that retail investors, relative to themselves, are more active than they were 12 months ago. We suspect that’s down to a lowering of fees, but there’s also speculation that there’s a boredom factor – people who would be betting on sports are looking for something to do during the pandemic.’
Day-trading concerns One prominent retail investor who has taken to day trading in the absence of betting on sports is Dave Portnoy, founder of Barstool Sports. With sporting events postponed due to Covid-19, Portnoy began live-streaming his day-trading exploits on the Barstool Sports website, which reportedly gets 8 mn visitors a month. By the middle of April, he had lost $647,000, but has since found more success, coining the phrase ‘all stocks go up’. He posts daily videos on his trading activity to Twitter, where they regularly get more than 100,000 views.
While Blake’s research suggests retail investors are contributing to volatility but not necessarily moving share prices, others have expressed concerns about a retail investor bubble. Jeremy Grantham, co-founder and chief investment strategist of GMO, believes retail volume is leading to a bubble that’s similar to Japan’s asset price bubble in 1989, the dotcom bubble in 2000 and the housing crisis in 2008. While retail shareholders may not drive changes in price with their own trading activity directly, institutional money takes notice of increases in momentum – so an uptick in trading volume can trigger a chain reaction.
For Andy Kramer, vice president of investor relations at iRobot, an increase in retail day traders isn’t a concern. ‘Day trading isn’t new and nor is access to disposable income,’ he says.
Of course, not every new retail investor is interested in day trading. For many people, the crash in March and bounce back from April to June represented an opportunity to buy shares in a company that may have previously been out of their reach, and they intend to hold on to those shares for a longer period of time. Special relationships For many retail shareholders, the appeal of buying shares in a company is personal. Perhaps they’re customers of that firm, or employees, or believe the company contributes positively to society. In these instances, IR teams have the ability to forge meaningful and personal relationships with their retail shareholders.
This is certainly the case at chocolate firm The Hershey Company, where many of the shareholders are current or former employees and residents of the local community in Hershey, Pennsylvania. ‘I think we might be a bit unique in that we’ve always had quite a bit of contact with our retail investors,’ says Gay Kaylor, manager of stockholder relations at Hershey’s.
Indeed, Kaylor has been in her position for 38 years and says she’s as likely to run into Hershey’s shareholders at the grocery store as she is at the annual meeting. ‘There’s a gentleman I run into almost every weekend when I take my dad to go shopping, and he’ll generally ask about certain things he’s heard [about the company],’ she says.
Part of that special relationship is down to the community nature of The Hershey Trust, which is a controlling owner of The Hershey Company, as well as a resort and entertainment group and a local school. But another part of the relationship is down to the fact that many of the company’s retail shareholders are also customers.
‘There’s something so special about what this brand means to people,’ adds Melissa Poole, vice president of investor relations at Hershey’s. ‘They’re invested from an emotional standpoint. Our shareholders love our product and that’s something we hold near and dear to our heart.’
Many retail investors are looking for an emotional connection to a company in order to invest in it. Unlike professional investors, they’re not likely to spend time understanding the financials, listening in on earnings calls and reading analyst reports. In many cases, that means retail investors are going to invest in consumer brands they know and understand. For example, the retail ownership of Amazon, Tesla and Zoom has more than doubled on Robinhood this year, according to analysis from Robintrack – with each company having more than 300,000 account holders.
For Michael Rosen, director of capital markets engagement at the CEO Investor Forum, part of Chief Executives for Corporate Purpose, the increase in retail shareholder activity coincides with another major capital markets talking point: stakeholder capitalism. ‘Retail investors are important stakeholders because they can also be your customers or your employees,’ he says.
‘In some cases those people are now in three of the five stakeholder buckets [customers, employees, suppliers, community at large and shareholders], and that should cause a fundamental shift in how you think about them.’
Rosen says this is going to be especially important as millennials become a more prominent force in society – acquiring greater wealth, investing more in the markets and advancing to more senior positions in corporate management teams.
IR Magazine’s sister publication Corporate Secretary recently reported on the rise of employee shareholder activism at companies such as Alphabet and Amazon.
IR strategies Many of the investor relations professionals interviewed for this article expressed a desire to communicate more meaningfully with retail investors, but noted the limitations of being able to do so.
‘We typically have limited budgets in IR and you get the best return for your dollars by focusing on institutions,’ Kramer says. ‘But we’re open to looking at new capabilities that help us to understand individual shareholders.’
For some IROs, retail investor relations means simply updating the IR website and sending out proxy materials ahead of the annual meeting. But with such a large rise in new retail investors during the last year, there are other IR teams thinking about how they can customize their messaging for a retail audience. This has been especially true since the Covid-19 outbreak, when many firms suspended dividends and began getting concerned calls from retail shareholders who rely on those payments. In these cases, complicated messaging may need to be simplified for this less sophisticated investor group.
‘One of the things that’s been on my mind is whether you need different communication vehicles or content,’ says Poole. ‘If you have people who have built a career on Wall Street, the types of questions they ask and the depth of their experience are different from a retail shareholder who might not know where to find information or have the same understanding. We try to make our remarks on the earnings call pretty accessible, but some shareholders may benefit from a one or two-page summary rather than having to read through a transcript or proxy statement to help them understand the key drivers of the business.’
The cannabis sector is further down the line in thinking about retail IR. Because cannabis is still federally illegal in the US, institutional investors are prohibited from investing in any companies that directly manufacture or sell cannabis products. For this reason, most cannabis companies still have a large retail base – and the volatile stock prices to show for it.
Jeffrey Goldberger, managing director of KCSA Strategic Communications, has been advising cannabis companies for a number of years. ‘The retail investor has an insatiable appetite for news flow,’ he says. ‘While we try to make sure our clients are putting out meaningful news, sometimes you have to bend a little bit, particularly if you have a large retail base. Out of sight, out of mind doesn’t work so well.’
Many of the large cannabis firms in Canada issue at least one press release a week, to retain visibility with their retail base. This can be exhausting and counterintuitive for some of the seasoned IROs working in the sector, but it’s become part of the expectation of the sector’s retail shareholders.
While this frequency of press releases is impractical for IR professionals outside of the cannabis sector, Goldberger emphasizes his point about maintaining visibility, even if your releases are less frequent. Social media is seen as a blunt instrument by many IR professionals who are dubious about whether it’s worth the return on investment of time. But Goldberger says communications can be much more targeted than many think.
‘Consider how to pinpoint your messaging through social media channels, especially Twitter,’ he suggests. ‘Look up relevant hashtags for your sector and get an understanding of who is looking for information and news flow on Twitter.’
There are large communities of retail investors on both Twitter and Reddit that frequently discuss specific companies, analyze earnings calls and daily price movement, and outline different investing strategies (see Where do retail investors get their information?[L]). But all this assumes an engaged retail shareholder who wants to know more about the company and its financial performance. While that profile of retail investor may be more prevalent during the Covid-19 pandemic, as people continue to work from home or not at all, it’s not necessarily the norm – which raises the question: if you’re an IR team that wants to understand and communicate with your retail base, how can you build better engagement? What’s the pull mechanism?
Drawing your retail investors in For Agnies Watson and Nicole Maselli, the solution lies with firms offering and publicizing perks that investors receive. For instance, if you own more than 100 shares in Ford for longer than six months, you qualify for a discount on Ford vehicles. But it’s not necessarily widely known, and the process of redeeming the perk is onerous: it involves completing paperwork and sending it back to Ford in physical form to get approval.
Watson and Maselli are co-founders of Stockperks, an app that highlights the perks available to retail investors. ‘Many companies realize they need to have a better channel with the retail community because they haven’t been engaged with it and they don’t have the right tools to engage,’ says Watson. ‘We do so many perception studies and analysis on our institutional investors, but we have no idea what [as many as] 30 percent of our investors feel.’
If the app is successful, Watson and Maselli believe it will provide IR teams with an opportunity to build more meaningful relationships with their retail base – essentially replicating the special relationship Hershey’s has with its retail investors, but at scale.
While retail investors will repeatedly return to the app to redeem perks, Watson and Maselli also want to provide IR teams with useful tools to learn more about their retail base. IR professionals will be able to survey their retail investors and publish simplified retail-focused communications around earnings, company announcements or the annual meeting.
Retail investors vote with management This last point is especially pertinent. Retail participation in proxy voting is behavior that most IR teams would like to encourage, but acknowledge the difficulties in driving. In years when the proxy meeting is straightforward, this is a slight concern in an otherwise straightforward process.
But if there’s a shareholder proposal or activist situation, the ability to ramp up retail investor outreach and proxy solicitation can be expensive, time-consuming and a white-knuckle ride. When Procter & Gamble faced its infamous proxy fight with Trian Partners in 2017, Trian’s Nelson Peltz alleged that P&G spent more than $100 mn – and a large chunk of that went on proxy solicitation. P&G did not respond to a request for comment.
Retail investors are more likely to vote with management than a shareholder proponent or activist investor, according to analysis last year by academics from Duke University, Berkeley University and Columbia University, and can therefore be decisive in close proxy contests. As is the case with activism preparedness and counteracting short-reports, it’s harder to make up for lost time. If your shareholders – institutional or retail – could be decisive in a contest, but don’t feel they know enough about your company, a counter-narrative can be more appealing.
With such significant changes to the retail investor landscape, and such an increase in new retail investors, these issues could become more pressing in the coming years. A more socially conscious millennial retail investor base could be less loyal to management on issues such as climate change or employee relations.
While the tools to communicate with these retail investors are still nascent or questionable in terms of reach, there’s a case to be made that IR teams should be looking at whether more can be done to build relationships with their retail shareholders.
As the number of new retail investors has grown, so too has the demand for information on investing and specific public companies. For many years, organizations like MoneyShow and TD Ameritrade have provided resources for individual investors, while financial advisers have also been common.
But a significant number of younger investors are turning to alternative sources of information. There are several investing groups on Reddit – ranging from individuals looking for the kind of advice you might receive from a financial adviser to day traders in penny stocks – and several have more than 1 mn members, while there is also an active Twitter community using the hashtag #FinTwit. Conversations are often lighthearted, self-deprecating and sprinkled with memes, but there are plenty of examples of users posting detailed investment theses about firms. All commenters use aliases and the true identity of the users is rarely known.
The communities are self-regulated by moderators. One, a 28-year-old CFA with the username u/CrasyMike, tells IR Magazine he has concerns about how the members of two groups he moderates (r/Investing: 1.1 mn members and r/PersonalFinanceCanada: 214,000 members) consume information. ‘Reddit likes to think of itself as an alternative source of information but it ends up becoming the primary source of information for a lot of users,’ he says. ‘Members would rather have anonymous advice than expert advice. We have some mortgage brokers who can’t post their name or profession. People don’t like the idea of things being put in a community by the people who represent traditional information.’
Many press releases from cannabis companies are posted in these investing groups – especially those dedicated to cannabis investing – and there are discussion threads about specific companies that last for hundreds of comments. Several IR professionals from the cannabis sector, who did not want to be named, tell IR Magazine they are frustrated by the discussions of their company on Reddit, partly because it can contribute to volatility and partly because the conversations can be rude or disrespectful. One IR professional explored the possibility of hosting an Ask Me Anything – Reddit’s equivalent of a fireside chat – but was brought to tears by the rudeness of the moderators she engaged with.
Beyond Reddit, a number of other non-traditional data sources cropped up during interviews for this feature, including WhaleWisdom, Quiver Quantitative, Invstr and TradingView.
