Surge in retail investing

If there is anything positive about the battered stock market so far this year, it’s the fact that retail investors have become a major driving force in providing liquidity and moving the prices of listed companies. Preliminary data from the Philippine Stock Exchange (PSE) showed that individual investors accounted for more than 45 percent of market turnover in the first quarter of the year, up from just 26.9 percent in 2020 and 18.2 percent in 2019.

This development is significant, considering that foreign investors continued to exit the local market as net foreign selling from January to March reached P47.91 billion, bigger by 55.1 percent from a year ago. While traditional small investors would normally flee the market when they see foreigners leaving and prices falling, the expansion in their share in trading turnover in the first quarter indicated some maturity—relying on the fundamental fact that while stock prices are depressed due to the recession, coming in at this point would yield the biggest returns once the economy starts to recover. The main stock barometer PSE Index ended the first quarter at 6,443.09, down by 9.8 percent in part due to the resurgence of COVID-19 cases.

It is worth noting that while the stock market is a venue for companies to raise funds for their operations, capital raised by companies at the PSE for both primary and secondary offer shares in the first quarter amounted to only P41.63 billion of the more than P600 billion in total transactions during the period. In short, the majority of transactions in the stock exchange dealt with secondary shares traded among institutional and retail investors, with prices reflecting developments in the big listed companies and, sadly, sometimes rumors about speculative stocks that are “played” by some traders.

One explanation for the increasing number of small investors engaging in stocks is that the pandemic lockdowns may have driven cash-awash individuals to chase higher-than-bank-deposit yields in the local stock market. Note that interest rates are at record lows since last year and are expected to remain depressed in 2021. The digital transformation of stock trading has also definitely helped increase the number of market participants. Opening new accounts has never been easier, and tech-savvy investors can monitor their accounts and even trade using their smartphones and laptops.

A word of caution then is in order. Individuals must invest their savings and not borrow funds in the hope of making a “killing” in stocks because they saw posts of friends or other people in social media bragging about how easy it is to make money in stocks. The recent surges in stock prices, for instance, were mostly of speculative stocks, or those that were being “driven” or being pushed by some traders and big players seeking to drive demand that could raise prices at levels that would be profitable for them when they unload shares they had bought much earlier. Some of these trades were quite scary, with prices doubling in less than a week, only to fall as sharply in the succeeding few days.

Prospective and even existing individual investors would do themselves a favor if they arm themselves with the proper tools to be rational investors. They may want to attend the free online seminars conducted by the PSE and many stock brokerage firms, for starters. A beginner course on stock trading is a must for anyone seeking to venture into this investment outlet. They can also ask stockbrokers with online trading platforms to provide them with a refresher course on stock market trading before committing to invest their money.

As people have spare time due to the pandemic, individual investors should devote some of it to first learning the basics of stock market trading (the PSE website is a good place to start), read and research a lot on corporate developments and economic events here and abroad that have an impact on the performance of listed companies, and rely on the expertise of their brokers — not on rumors in social media — to at least have an edge in becoming successful in making their hard-earned savings grow.