With recent development in the latest retail versus institutional investors news, it is important to recognize what possible outcomes can come from this new found power of retail investors.
Though it is obvious now what non fee brokerages has provided in volatility and valuation of market, not many has predicted how far this battle between retail investors and institutional could go. To start understanding the impact, it is important to remember who are these new investors. Two of the many common behaviors,characteristics retail investors share are:
1. Retail investors lack the research and experience available to the institutions.
2. Retail investors has no other obligation other than their personal agenda while institutional investor have to follow the investment policy that is outlined with their clients
Because institutional investors deal with large capital compared to retail investors, they have to be careful not to move the market with their decisions. While multiple retail investors on whole could inflate a stock without legal consequences as their merely have opinions about a stock. It would be very difficult for SEC to prove that 1,000 individual investors all agreed to inflate a stock price just because of their transactions.
Hence, it is given that the P/E ratio of the market as a whole has been increased merely due to more capital has entered with no cost and no defined plan. This fact itself should be enough for value investors to consider expansion of P/E ratio of a security could be inflated and still be considered attractive.
This wave of new and inexperienced investors could sway market volatility into wider ranges. Other possible new market behaviors due to the entrance of many retail investors include:
1. The effect of economic recession will be multiplied given large retail investor will be liquidating to for lost income, increased expenses and inflation
2. The longer retails investors are involved, the more experience it will gain and every trading strategy has increased its followers base
The second point from above is the reason why it is so important for ESG and Impact investing professionals to start spreading more information on this topic. It needs to go as far as to be a large chapter in every CFA level curriculum as it is important to have new investors to understand the risk and the wide range benefit it can offer.
