Corporate America starts paying attention to retail investors

According to the Federal Reserve, US households bought roughly US$211 billion in individual stocks last year. PHOTO: BLOOMBERG

(NYTIMES) - After reported its quarterly results recently, executives at the company, which sells replacement car parts, did something rather unusual.

They hosted a virtual meeting with about 2,000 guests who gathered to learn about the company. How did the business work? Why was able to offer lower prices than brick-and-mortar rivals? Were shares worth buying?

Mr David Meniane, the chief financial officer and chief operating officer, called the session an experiment. "We're trying to disrupt the way people fix their cars," he said. "Is there a way for us to disrupt how retail investors communicate with management?"

As the stock holdings of American households have soared to a record level over the past year, dozens of firms are suddenly paying more attention to individual investors. Some, like, are trying to transform newly minted traders of Reddit-fuelled viral "meme stocks" like GameStop into dedicated shareholders. And some of those meme stock companies, including GameStop itself, are issuing new shares.

"The individual shareholder is back," said Professor Lawrence Cunningham of George Washington University Law School, who researches corporate governance and runs a project that studies individual shareholder behaviour. "Corporations would do well to pay attention and cultivate them." Small investors who buy single stocks have not been a major force in financial markets for the better part of half a century.

In the 1980s and 1990s, as people moved their money into mutual funds, large fund managers and Wall Street analysts became the constituency most important to corporate America. According to Sifma, a brokerage industry lobbying group, individual investors owned just 38 per cent of the stock market in direct shares in 2018.

Such investors were growing in influence before the coronavirus pandemic, partly because of the popularity of free trading apps such as Robinhood, which meshed the buying and selling of stocks with game-like features.

But with millions of Americans stuck at home during the pandemic, the trading trend escalated. According to the Federal Reserve, US households bought roughly US$211 billion (S$280 billion) in individual stocks last year - the highest level since 2014.

"Retail trading now accounts for almost as much volume as mutual funds and hedge funds combined," Ms Amelia Garnett, an executive at Goldman Sachs' global markets division, said.

"So, the retail impact is really meaningful right now."

There's no telling how long Americans will keep their pandemic-bred focus on the market. Average daily trading volume at some large brokerage firms has plunged from its peak in January, and as vaccinations continue and the economy reopens, newly mobile Americans may be less interested in picking stocks. But firms, awakened to the power of individual investors, are seizing the moment, and finding new ways to engage with them.

"It's forced companies to understand the importance of retail investors," said Mr Zach Hascoe, a co-founder of Say Technologies, a start-up that sells shareholder communication services to companies and brokerage firms. "Companies are seeing the opportunity to kind of tap into shareholder loyalty, tap into that passion."

New York-based Say Technologies offers a social-media style platform that allows firms to field questions from verified individual shareholders at key corporate events. Investors can pose their questions on Say's message board, which can then be up-voted, Reddit-style, by other participants.

Before Lemonade, a company that sells insurance to consumers online, went public in July, it went on a traditional tour of Wall Street, meeting big investors and talking up its prospects. However, the company has since discovered that over half of its shares are held by small investors, excluding insiders who own the stock, said CEO Daniel Schreiber.

That has prompted a strategy adjustment. In addition to spending time communicating with analysts whose "buy" or "sell" ratings on the stock can move its price, he has made a point of doing interviews on podcasts, websites and YouTube programmes popular with retail investors.

"I think that they are, today, far more influential on, and command far more following in terms of stock buying or selling power than the mighty Goldman Sachs does," Mr Schreiber said. "And we've seen that in our own stock."

Academic research suggests that over the longer term, it can be a competitive advantage for a company to have a patient base of investors who understand and believe in its strategy.

Take Amazon. Its share price kept rising over the years, despite its skimpy and unpredictable profits and widespread scepticism from Wall Street. The individual shareholders who held Amazon stock bought into the vision of its founder Jeff Bezos, and saw no problem with Amazon recycling its enormous cash flows back into the company rather than paying dividends. Many of those shareholders are now rich; someone who bought US$1,000 worth of Amazon shares at the start of 2000 would be sitting on more than US$4.3 million today.

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