Atish is EquityZen CEO, former quant at AQR Capital, Penn alum who loves FinTech, python, traveling, and tennis.
The buzz about Reddit’s IPO is a reminder of the power that comes when retail investors work collectively. Retail trading reached a high in 2023, accounting for about 23% of trading volume during one week early in the year—proving that the power of the retail investor is more than just the meme stock frenzy. Despite fears of a recession, median net worth surged 37% between 2019 and 2022 showing record growth. With this, stock market participation increased.
So what does this all mean? Here I unpack what this shift means for both public and private markets.
What’s Driving The Rise Of Retail Investing?
Macro trends, like the broader market, move in cycles. The trend of “technologification” has driven retail investment participation. Retail investors have benefited from several fintech trends, from fractional shares to mobile brokerages and socially driven communities that have led hordes to invest driven by “FOMO.” These once-new technologies have lowered the barriers to entry, making investing easier than ever and driving adoption.
As a result, more families than ever directly own stock. In fact, between 2019 and 2022, direct stock ownership grew from 15% to 21%, the largest change on record. These investors can move markets, and both public and private companies are taking note.
Retail Investors Can Have A Big Impact On Public Companies
Successful brands have learned to listen to consumers, creating products that resonate. After all, customers who feel connected to brands are more likely to increase their spending and 76% more likely to buy from them over a competitor.
Similarly, public companies are realizing the need to address the concerns raised by retail investors. These investors can boycott or short stocks and vote with their dollars just like they do when purchasing a product or service. While this may lead some retail investors to boycott investments in companies they are morally, or otherwise, opposed to, others may be the very bettors who support those companies.
Public companies are highly susceptible to the power of the retail investors, 47% of whom want to be “more involved” in the companies they invest in with 58% voting their proxies to make their voices heard. In aggregate, these retail investors can move markets, exemplified by the $15.6 billion in retail outflows in October 2023 alone. Public companies have a spotlight on their stock price.
Few firms have the power to sway public opinion, so most must listen to public sentiment. Thirty-four percent of retail investors have made an investment change because of social media content. The ability for public companies to control, or at least participate in, the social media-led conversations that are driving trading activity in an authentic way is more important than ever. While GameStop couldn’t control the flurry of social media activity that drove the meme-stock frenzy in 2021, they learned the importance of keeping a pulse on retail investor sentiment, and this means paying attention to social media.
Private Companies Are Less Influenced By Retail Investors But Not Immune
When it comes to private companies, retail investors cannot exert the same influence that they can on public companies. Perhaps the biggest reason is that access has historically been limited to primarily institutional investors. Since less than 20% of U.S. households are considered accredited investors, the pool of retail influence is vastly smaller than it is for public markets.
Furthermore, there isn’t a publicly published stock price in the private markets. This means that even for investors who can act, the lack of price and financial transparency provides less real-time information to act on. Finally, you can’t short private companies. So while private market investors can invest in companies they believe in, they can’t actively benefit from the depreciation of those they don’t.
While the lines are blurring between public and private companies as companies stay private longer, certain differences will remain when it comes to retail influence. That doesn’t mean, however, that retail investors cannot be a force to be reckoned with in private markets. Private companies with consumer-facing brands often find themselves catering to retail investor sentiment because it is also the sentiment of their customers.
The teeming secondary market that did not exist a decade ago is also changing the dynamics. Retail participation is driving more price efficiency, simply as more trades take place. Retail investors are voting with their dollars and even their bids are helping create a more holistic view of investor sentiment. This data is crucial, especially for companies preparing for an IPO as it gives a sense of retail sentiment in a market that historically has only reflected institutional interest.
Private companies will need to become attuned to retail investor sentiment earlier, like their public counterparts. After all, today’s private companies hope to be tomorrow’s public companies. Therefore, the more mature and “IPO ready” a private company is, the more it must prepare for the impact of retail interest on its stock price. As the private markets grow, retail investors have more opportunities to support brands, not only by being evangelists of them, but also by investing in them. This economic alignment drives stronger loyalty, which can continue post-IPO.
Retail Investors Are Making Themselves Heard
While retail investors hold more influence in the public than private markets, this is changing as more investors gain access to private market investments, disrupting the power dynamics in a market where private companies and institutions have historically held the cards. As retail participation grows and social media-driven investing solidifies itself beyond a trend, private companies eyeing an IPO will be wise to consider retail investors when planning their public market debut. You see this with Reddit’s decision to allocate IPO shares to 75,000 power users, many of whom are powerful voices in the retail market.
All in all, this is good for the market. The more voices that are represented, the more efficient and democratic a market can be. As the next wave of private companies prepares to go public, I’ll be keenly watching how retail investors respond. They have the power to move markets and will continue to.
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