The world of investing has undergone a remarkable transformation over the past few decades. What was once the exclusive domain of the wealthy and institutional investors has become more accessible to the average individual. If you are coming from the first post then you know how much of a big deal this is. This shift, often referred to as the rise of retail investment, has democratized financial markets and opened doors for everyday people to grow their wealth.
Welcome to the second post in my series of Learning to Invest in the New York Stock Exchange (NYSE) from Africa. I thought about two concepts that I have come across quite a bit that you will likely come across as well: retail investment and fractional shares. Everyone talks about this or writes about it in such a matter-of-fact way and since we are learning together, I thought it would be good to bring this up.
What is Retail Investment?
Retail investment refers to the practice of individuals, rather than institutions, investing their money in financial markets. This can include buying stocks, bonds, mutual funds, or exchange-traded funds (ETFs). Retail investors are often motivated by personal financial goals such as saving for retirement, purchasing a home, or building generational wealth. If you want to know what motivates me: it’s all three!
Unlike institutional investors like banks, hedge funds, or pension funds, retail investors typically invest smaller amounts of money. However, the collective power of retail investors has grown significantly, especially with the advent of online trading platforms and mobile apps, which have simplified the process and lowered barriers to entry. Now, with pretty much a few clicks and a KYC verification, you can start investing.
The History of Retail Investment
The concept of retail investment began to take shape in the mid-20th century, particularly in the United States. Before then, investing was largely limited to the wealthy elite, as access to financial markets required significant capital, insider connections, and specialized knowledge.
The introduction of mutual funds in the 1920s and 1930s marked one of the first steps toward making investing more accessible. Mutual funds allow individuals to pool their money with others and invest in a diversified portfolio managed by professionals.
However, the real game-changer came in the late 20th century with the rise of discount brokerage firms and online trading platforms. These innovations eliminated the need for expensive brokers and reduced the cost of trading, making it feasible for the average person to participate in the stock market.
How People Invested Before Retail Investment
Before the era of retail investment, building wealth often meant relying on traditional methods such as saving in bank accounts, purchasing real estate, or investing in physical assets like gold. While these options were effective for preserving wealth, they offered limited opportunities for significant growth compared to the stock market.
Investing in stocks was primarily the domain of the rich, who could afford full shares of expensive companies. The full shares aspect is very important because at some point, you either bought a full share or nothing at all. Brokerage fees were prohibitively high, and accessing financial information was cumbersome, making it difficult for the average person to navigate the market.
What are Fractional Shares?
Fractional shares are one of the most significant innovations in modern investing. Simply put, they allow investors to purchase a portion of a single share of stock rather than buying an entire share. For example, if a single share of a company costs $1,000, fractional shares let you invest as little as $10, owning a fraction of that share proportional to your investment.
This concept has made investing in high-value companies more accessible to retail investors. Platforms like EasyEquities, Robinhood, and others have embraced fractional shares, enabling people to invest in their favourite companies regardless of their budget.
Fractional shares also allow for greater diversification, as investors can spread their funds across multiple stocks or ETFs without needing a large amount of capital. This makes it easier to create a balanced portfolio and reduces the risk of concentrating investments on a single asset.
Conclusion
The rise of retail investment and innovations like fractional shares have revolutionized the way people build wealth. What was once reserved for the wealthy elite is now within reach of anyone with a smartphone and a willingness to learn. By making investing more inclusive, these developments are empowering individuals to take control of their financial futures and participate in the growth of the global economy.
This is part two in Archie Moyo’s series, “Learning to Invest in the NYSE from Africa” in which he starts his journey investing on the New York Stock Exchange from Africa. Archie is not a financial advisor or professional. The series exists to take other fellow investors on the journey with them and provide resources for new retail investors.