FINRA Research: Pandemic brings surge of new and experienced retail investors into the stock market

Written on May 27, 2021

In a year when a pandemic gripped the world, beginning and experienced retail investors flocked to the stock market using taxable, non-retirement investment accounts, according to new research by the FINRA Investor Education Foundation (FINRA Foundation) and NORC at the University of Chicago.

The study, Investing 2020: New Accounts and the People Who Opened Them, found that market dips that made stocks cheaper to buy and the ability to invest with small amounts were among the top reasons younger and inexperienced investors reported entering the stock market. For respondents who opened new accounts in 2020, investing for retirement was the most frequently cited reason for opening the account, despite the study’s focus on taxable investing.

Researchers further found that the majority of new investors—meaning those who opened a non-retirement investment account for the first time during 2020—were under the age of 45 and had lower incomes than investors who already owned taxable investment accounts prior to 2020. New investors were also more likely to be racially or ethnically diverse.

Researchers surveyed nearly 1,300 households in 2020. Respondents were grouped into one of three categories: New Investors who opened one or more non-retirement investment account(s) during 2020, and did not own a taxable investment account at any time before 2020 (38%); Experienced Entrants who opened a taxable investment account during 2020, and also owned an existing taxable investment account opened before 2020 (19%); and Holdover Account Owners who maintained a taxable investment account that was opened before 2020 but did not open a new account during 2020 (43%).

Across investor categories, a number of differences emerged. Key findings from the report include:

  • The largest portion of African American investors (17%) were New Investors, and the largest share of Hispanic/Latino investors were concentrated in both the New Investors (15%) and Experienced Entrants (17%) groups.
  • New Investors held smaller balances in their taxable accounts when compared to other investors. Also, 23% of female investors reported balances under $500, compared to 15% of male investors.
  • Across all categories, a large number of investors reported not knowing whether their investment account charged commissions on trades or whether their account allowed purchasing on margin.
  • While all investors reported relying on a variety of information sources when making financial decisions, Holdover Account Owners more frequently relied upon financial professionals, while Experienced Entrants more frequently conducted their own personal research, and New Investors more frequently relied on the advice of friends and family.
  • Investment knowledge was low for all groups, though particularly low for New Investors. On average, New Investors could only answer 1.4 out of 5 investment knowledge questions correctly. FINRA offers an array of resources, including mini-modules on Smart Investing, to help investors build essential investment knowledge and skills.

Differences also emerged among new investors by age and race/ethnicity when survey respondents were asked what prompted them to open a new account in 2020. And across all categories of investors, there were stark contrasts surrounding investment goals, risk taking, trading behaviors and investment decision-making.

Leave a comment