“Retail investors are only interested in buying & selling stocks to achieve quick profits”. A regularly touted statement that may not necessarily be true. In the world of investment, such investors would be known as “flippers”. However, it would be unfair to group all retail investors under the same category when a large contingent of them turn out to be long-term and loyal shareholders.
So, how did this perception of the retail investor come about? A number of events have played their part. Recently, the gamification of stock trading, with so-called “meme stocks” and the influence of “Reddit traders”, could lead to the misconception of retail investors as short-term traders, with little regard for the stability of the markets or the companies in which they are investing in.
Yet, the lack of awareness surrounding retail investors’ intentions in the stock market is not new. Looking back in time, other events could – for completely different reasons – also lead to the impression of retail investors as focused on short-term gains. Notably, the privatisation of British Telecom (BT), and the subsequent wave of denationalisation that took place in the 1980s and 1990s, focused heavily on incentivising the retail investor to participate in these initial public offerings (IPO).
The privatisation of BT
The privatisation of BT and its listing on the London Stock Exchange marked the first national flotation of a public utility. On August 6, 1984, BT became a public limited company – of which 50.2% was offered for sale to its employees and the public in November of the same year.
This historic moment marked the start of a number of privatisations for state-owned utilities over the course of the next two decades. It was also a major milestone for retail participation in capital markets, with more than three million ordinary shares offered for sale to the public. By the time the offer closed, the retail offer was 3.2x oversubscribed.
The transaction raised a total amount of £3.9bn, with nearly 96% of eligible BT employees becoming company shareholders. Despite its success, criticism was rife that the shares had been priced lower than market rate. Yet, this was arguably intended as one of the main retail incentives adopted by the government for the listing.
- Incentive 1: The shares were offered on an instalment basis, with an initial 50p payable on application (for a purchase price of 130p per share) and a further two payments down the line.
- Incentive 2: The shares were offered at a discount to the institutional price.
- Incentive 3: If shareholders held their shares for three years, a bonus share would be given for every 20 bought during the listing.
Having offered such incentives for the listing of BT, it became very tricky for these not to be part of subsequent privatisations. Arguably, it is these buyer incentives that have encouraged the notion of the retail “flipper”. Indeed, while incentive number three was intended to neutralise the benefit that a cash discount otherwise provided and encourage long-term shareholding, the first two incentives naturally encouraged retail investors to flip their shares.
Who is the retail investor?
Notwithstanding this lesson from ancient history, it would seem that a significant percentage of today’s retail investors do hold their stock for a reasonable period of time, in turn developing a real interest in the companies in their portfolio. With BT, two-thirds of the two million people who subscribed to the listing took advantage of the small shareholders’ loyalty bonus [source: hbr] – a testament to their ability and willingness to hold stock for the long-term.
Separate studies on shareholder attitudes and behaviour indicate that most retail investors are loyal, long term-minded providers of capital and a vital source of support and liquidity for companies – especially small and medium-sized enterprises. And they aren’t the only ones to gain – in a world dominated by algorithmic trading and passive strategies, retail inclusion yields tangible benefits for issuers. A diverse mix of investors helps increase trading liquidity and foster better deal outcomes. It is also paramount to good corporate governance – ensuring all shareholders are treated on an equal footing.
Retail investors are not a homogenous shareholder segment. Often ignored in favour of institutional investors, they are extremely valuable and bring much-needed diversity to the market. While some may remain sceptical about retail participation in capital markets, those willing to embrace it will reap the benefits.