How the new breed of investor is disrupting the financial markets

A swathe of new retail investors has flooded the financial stock markets over the last year.

Armed with lots of time on their hands, access to free trading apps, and online message boards, these so-called Reddit vigilantes temporarily turned Wall Street on its head. 

The GameStop saga was just one incident (perhaps the first of many), but it marked an important milestone.

For the first time in history, collective action on Reddit caused the price of a struggling video game retailer to shoot up, forcing institutional investors who were betting against it to repurchase the stock, thus driving the price even higher. 

Who would’ve thought that a bunch of supposedly inexperienced new investors were suddenly capable of influencing a market dominated by multibillion-dollar hedge funds? 

If they’re capable of doing this, it’s worth digging deeper into their behaviors as investors, the unique stamp they’re starting to leave on financial markets, and why they’re an important demographic for brands. 

Democratizing finance paved the way for new market entrants. 

Investing today is just a few clicks away online. It’s become as frictionless and simple as online shopping or scrolling through social media. 

Just a brief glance at Robinhood or Etoro and you’d see platforms that very much resemble social networks. 

Features like copy-trading – which allows you to mirror the trades of more experienced investors – and the ability to buy just fractions of trades have turned investing into just another lockdown pastime. 

Technological advancements coupled with pandemic-induced market volatility created the perfect conditions for digitally-savvy investors to enter the stock market in full swing.

In the UK and U.S., the share of Gen Z and millennials who own investments has grown by 20% and 16%, respectively, in the space of a year. 

In fact, millennials have now caught up with Gen X and, at the rate they’re going, we expect them to surpass their parents, and perhaps even their grandparents soon.  

We can finally bury the stereotype that millennials lack financial literacy or security and begin to see them for what they really are – committed investors. 

What matters here isn’t the fact that a few novice investors got lucky off a short squeeze though – that’s just why they got noticed. 

It’s that the largest generation in the U.S. and soon-to-be the largest in the UK is entering the financial markets for the first time ever; and they’re doing it in style. 

As we’re about to see, these young investors aren’t really copying their parents, and this will inevitably have broad implications for the wealth industry. 

High risk tolerance doesn’t mean recklessness. 

We come full circle since the pandemic-induced crash back in March and new investors show no signs of slowing down. In fact, they keep expanding their share of the market with more enthusiasm than ever.  

Around 3 in 10 of those investing over the past year in the UK and U.S. started doing so in 2021. 

The narrative suddenly turned from portraying young adults as having no assets and no wealth to inexperienced, risk-prone kids fueling a market bubble. 

And although they naturally lack the experience of their parents and grandparents who have been investing for decades, young investors aren’t necessarily reckless investors. 

In fact, our data shows they’re very quick to adopt what are considered ‘good‘ investing habits once they’ve been in the game for some time. 

This is evident when we compare the attitudes of the newbie young investors to their slightly more seasoned counterparts.

Gen Z and millennials who have been investing at least since last year are much more likely to have a long-term investing mentality, to have a financial adviser, as well as a strategy they adhere to. 

They may be young and more prone to choosing high risk investments, but they’re not as irresponsible as you’d think. 

Contrary to common beliefs that they’re scrolling through social media for investment advice, it’s actually finance and investment websites that are their go-to for investment information (42% use them). 

They’re certainly not kids either, given 35% are decision-makers in the workplace and a third are parents. 

So, although young investors may be attracted to the market due to hype and FOMO at first, they’re quick to realize investing isn’t just a short-term game; and this shines through when we look at what they base their investment decisions on as well.  

They are driving the CSR revolution.

Across a wide range of today’s issues – from gender equality and human rights, to the future of the environment and sustainability – younger groups express more strident views than their older counterparts. 

Our custom coronavirus research revealed Gen Z and millennials are the most likely to believe companies behaving sustainably and individuals reducing their personal carbon footprint had become more important to them since the pandemic.

Six months later, our Zeitgeist research confirmed this sentiment with 7 in 10 of this group saying big corporations should be doing more to address environmental issues. 

And although stated values and beliefs don’t always translate into actions, we’ve seen they do make a difference when it comes to young adults’ investment decisions. 

Compared to Gen X and boomers, young investors are much more likely to take into account a company’s CSR and environmental policies when making an investment decision. 

This isn’t to say that young investors don’t consider the hard numbers like past stock performance or companies’ balance sheets (4 in 10 do). It just means they’re more likely than their older counterparts to invest in a company’s long-term vision for the future than in the “here and now”.

Yes, these young investors might not have the same purchasing power and influence on the stock market just yet, but we shouldn’t underestimate the intergenerational wealth transfer that’s taking place. It’s estimated at over $30 trillion in North America alone. 

And with a third round of COVID-19 stimulus checks expected to come in March, many are already planning their investments.  

The stake millennial investors have in companies won’t just be from a shareholder point of view though.

As this group is entering their peak earning years, they’re also representing a greater portion of decision-makers in the workplace.

This means their influence over business decisions will increasingly come from both being leaders in the workplace, as well as shareholders with a degree of influence over corporate governance. 

They’re pushing crypto to the mainstream.

2020 saw digital currencies explode in popularity, with the recent investment by Tesla into bitcoin capping it off. 

To put this into perspective, in 2019 11% of U.S. and UK online investors owned cryptocurrency, and this was the least prominent investment held at the time. 

By comparison, in the past year alone 18% have purchased cryptocurrency, making it the third most commonly purchased investment, just after stocks (55%) and mutual funds (31%). 

But the question remains, how much of this has been driven by young retail investors.

The answer is, a fair amount: 

Two thirds of those that have invested in crypto in the past year are Gen Z or millennials. 

And although there’s talk of this group’s love for crypto stemming from the fact they expect a short-term gain, their profile as investors show otherwise. 

Crypto investors are actually 26% more likely than the average investor to invest with a strategy in mind. 

Digital currencies are decentralized assets so they’re more likely to pull through sharp downturns in financial markets that may occur in the future. 

As one of the few assets that’s thought to be immune to inflation, which is likely around the corner, they may well be young adults’ long-term safe-haven assets. 

Either way this new breed of investors is here to stay and the impact they’ll have on the financial markets will be profound. 

From driving the sustainability agenda, to believing in disruption and digital money, they invest with a new mentality that’s driving change in the world. 

Why brands should pay attention to them

Compared to the average internet user their age millennial investors hold enormous purchasing power.

The vast majority of them occupy the first (54%) or the second (20%) quantile of our purchasing power segmentation¹, meaning they represent a key target demographic for brands in the post-COVID recovery stage.

With life largely being in a limbo over the past year, a large proportion of their savings and investments have not yet been utilized.

Our data shows that UK and U.S. millennial investors are more likely than the average investor to purchase 44 of the 48 products we ask about in the next 3-6 months ­– a testament that revenge spending is on the cards.

This pent-up demand is great news for discretionary brands in the travel and luxury sectors that were hard hit by the crisis.

We’re already seeing high-end luxury brand LMVH emerging from the pandemic stronger than ever, while at the same time preparing for further expansion in its ecommerce and direct-to-consumer businesses through strategic acquisitions.

Similarly, in the travel industry, Airbnb is “laser-focused on preparing for the travel rebound”.

Whether through day-to-day spending, or via more long-term, high-ticket purchases, the new breed of investors will be key in bouncing the economy back in 2021.

¹The quantiles are calculated by combining GWI Core Household Income data, taken from the individual country household income questions, with International Dollar Purchasing Power Parity, or Global Dollar Value, data taken from the IMF. This allows us to assign each income bracket with a value in dollars so that the value represented by each income bracket is comparable across each market.