Surge of retail investors driven by ability to invest small amounts

Rick Steves

We may be witnessing a shift towards more equitable investment participation. This research offers insights about pathways to financial inclusion and a roadmap to help inexperienced investors, women, and people of color close the wealth gap.

A study conducted by FINRA and NORC at the University of Chicago found that retail investors in 2020 were driven by the market dips caused by pandemic fears and the ability to invest with small amounts.

Investment knowledge was low for all groups of retail investors, but new Investors could only answer 1.4 out of 5 questions correctly on average, they were under the age of 45, were more racially or ethnically diverse, and had lower incomes than experienced investors.

The most frequently cited reason for both experienced and new investors was retirement investments, according to the study. “The spike in new investors demonstrates that people, given access and opportunity, will take steps to participate in the equity markets, potentially benefiting from the historically higher long-term returns these markets offer,” said FINRA Foundation President Gerri Walsh.

“On the one hand, this research offers the investment industry, investor advocates, and policymakers critical insights about pathways to financial inclusion for all Americans and presents a roadmap to help inexperienced investors, women, and people of color close the wealth gap. On the other, low levels of investment knowledge among all types of investors in the sample—new and experienced—underscore the importance of educating investors about risk and reward, costs and fees, tax consequences of investing and other key concepts”, Ms. Walsh added.

Mark Lush, manager and behavioral scientist in the Behavioral and Economic Analysis and Decision-Making (BEAD) team at NORC. “The reality is that investors who opened their first taxable investment account during 2020 were more racially/ethnically diverse when compared to investors already in the market. Our study also found that many of these new investors were prompted to open their accounts because of the ability to invest with a small amount of money. Taken together, we may be witnessing a shift towards more equitable investment participation.”

Of the 1,300 respondents, 38 percent were new investors, 19 percent were experienced entrants who opened a new account in 2020, and 43 percent were holdover account owners who did not open a new account during 2020.

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