Retail investors have flooded US markets with savings - what is it?

American households' interest in investing and speculating in the stock markets has not waned. In June, they sent a record amount of money to the stock markets. They are not discouraged by stock market indexes that are near all-time highs. 

From so-called retail investors, nearly $28 billion, or approximately $600 billion, flowed into U.S. stocks and equity funds last month. These are net purchases, i.e. the amount already net of securities sales. It was the highest amount since at least 2004, according to analyst firm Vanda Research, which has been tracking the data. All indications are that retail investors will continue to invest at record levels in 2021. Investment strategists at Goldman Sachs bank estimated last month that American households will buy $400 billion (8.5 trillion crowns) worth of shares in companies and funds traded on U.S. exchanges this year. At the same time, 367 billion dollars will most likely break last year's record.

The interest of small players is illustrated by a figure from financial house JMP Securities. According to the firm, retail US investors opened over 10 million trading accounts with brokerage firms such as Robinhood, Fidelity and Charles Schwab in the first half of this year. That's roughly the same as for all of 2020. 

Small investors are attracted to the exchanges by the appreciation of spare cash. An important factor in this is that savings accounts and money market funds, which used to be very popular in the past, offer zero or very low returns. Thus, small and professional investors have to take higher risks to achieve higher returns. In addition to equities, cryptocurrencies have become the subject of widespread speculation. 

While retail clients often have only a few hundred or thousands of dollars in their brokerage accounts, together they can move the stock prices of individual companies. This has been the case in recent weeks and months for the so-called MEME STOCKS, i.e., GameStop, AMC Entertainment, Blackberry, which we described recently in our article HERE. Their stock prices have skyrocketed by thousands of percent in a short period of time. 

Thanks to this, the share of retail players in the total trading volumes of stocks on US exchanges is growing. 

It has already climbed to 24 percent so far this year from 20 percent last year. Meanwhile, in previous years, retail investor activity has stagnated around or below 15 percent. 

The situation began to change in the second half of 2019, when other brokerages began joining Robinhood's platform to offer fee-free stock trading. The trend was then accelerated by the arrival of the coronavirus pandemic last spring. Millions of Americans began opening trading accounts. People saw stocks, which were suddenly cheaper by tens of percent, as a unique opportunity to value their spare cash. 

But there was also a desire to stave off boredom. Because of measures to prevent the spread of the disease, people were spending more time at home, and one way to keep themselves occupied was by trading on the stock market. The fact that there was suddenly nothing to bet on due to the interruption or restriction of professional sports competitions also contributed to the popularity of stock market speculation. 

A number of experts expected that with the pandemic receding and normalcy returning to ordinary and economic life, stock market activity by small investors and speculators would gradually subside, but as it turns out, nothing of the sort has happened yet. 

Minor investors are not deterred from trading even by warnings from strategists and professional investors that stocks are overpriced and sooner or later there is a risk of a major correction in prices to the downside. For now, however, the S&P 500 and other major U.S. stock market indices continue to hold near record levels thanks to demand from individual investors.