Assessing The Trend Toward More Individual Investors in Capital Markets

The trend toward individual investors in capital markets has been an increase both in the United States and Internationally. However, this trend is also skewed to more conservative investing such as in Government Bonds. This is due in part to perceived market risk and a believe that stock investing is best left to professionals. There are exceptions to this rule, for example in countries with higher than average Gross Domestic Product, riskier investment strategies may include a higher percentage of individuals and/or households.

This article will assess the trend toward more individual investors in the market in terms of national and international investment developments, and reasons for increases in the amount of market investors. Moreover, it will become evident from the information presented herein, that the movement toward individual investing is also tempered by guarded personal asset allocations. Section I discusses individual investment patterns, and underlying investor attitudes as they pertain to their investments in capital markets. Section II outlines some of the catalysts for an increase in individual investment.

Individual investment patterns

The number of U.S. consumers invested in the securities markets either directly or indirectly through retirement plans has risen more than 40% since the 1980's according to realclearpolitics.com, However, at the same time, U.S. and International household savings has declined according to an economic report by Dr. Catherine Mann of The Institute for International Economics. In Germany, a trend toward more cautious investing has emerged since 1997 as evident in a 2008 Celent report on German retail investment patterns; and Chinese household investing has been shown to have skyrocketed tremendously according to a May, 2007 New York Times article by Keith Bradsher.

To illustrate further, trading volume of the Dow Jones Industrial Average has risen from approximately half a billion shares day to a peak volume over nine billion shares. From 1928-1995, trading volume of the Dow Jones Industrial Average stayed under half a billion. The negative market psychology of the 208-2009 recession hasn't seemed to have impacted the trading volume of the DOW either. That is to say, despite a drop closer to 5 billion shares per day in the summer of 2009, average trading volume has actually increased during the recession. Post recession trading volume may be an indicator of the trend of individual investors in the securities marketplace, however accounting for the source of such volume is the real question.

Reasons for this increase in volume include 1) securities market accessibility by individual investors, 2) the expansion of brokerage firm services and 3) an increase in institutional investing. Based on the studies cited in this article, this increase in volume may only represent a minority, but perhaps wealthier portion of the private investment market. Either way, after the internet and real estate bubble bursts, this investment strategy may not suite the average American. This is reiterated by a 2005 USA Today report.

Reasons for increases in individual investment

1. Individual investment technology and information

Investment technology puts investment analysis tools and mechanisms previously only available to brokers in the hands of individuals. With high-speed computing and information transfer, investors are able to access a lot of the information needed for independent investing. Essentially, the technological entry barrier to individual investment has been largely removed from securities investment. Online trading, improved public access to financial information, and reduced brokerage fees and/or commissions are all factors that make individual investing more feasible.

2. Investment brokerage services

Brokerage services have expanded to include the type of financial services individual investors might value for convenience and affordability. This is due in part to the banking deregulation that took place during the 1990's. Specifically, the Gramm-Leach-Bliley Act of 1999 allowed banks to expand their financial services to facilitate modern day banking needs. This in turn gave individual investors more investment service options. For example, discount brokerage firms emerged to provide money market accounts, checking accounts, research and investment tools, online banking and in some cases credit accounts to a greater amount of investors.

3. Market psychology

A look at market psychology reveals a pattern of human behavior that trends toward individual investing yet significant financial caution. First, an example of a growing movement toward individual investing is evident in Australia according to the August 2004 issue of the Journal of Economic Psychology. In this example, Government policy has been indicated to be an promotional influence on individual investment for retirement planning. Thus, in the case of Australia, high individual investment is due in part to Government policy or leadership.

In the case of China mentioned in section I of this article, a massive increase in individual brokerage accounts was recorded in 2007. The psychology behind this is awareness of opportunity and the willingness to take part. Thus, the Chinese example illustrates a pro-active market psychology. Whether this market psychology was supported by commercial and/or governmental endeavors is unanswered here, but it does seem to demonstrate a correlation between economic expansion and investor participation.

Despite an increase in individual investing, the type of investing those investors engage in on average may be of lower risk. According to 'The Ultimate Investor' a book by Dean LeBaron and Romesh Vatilingam, cited studies indicate investors are indeed risk averse on average. This means long-term investing in lower risk financial instruments is more likely than higher risk financial choices according to the study. Thus, individual investing may be on the rise, but not necessarily in high risk kind of way.