New Research: Global Pandemic Brings Surge of New and Experienced Retail Investors Into the Stock Market

WASHINGTON, D.C.— 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.

“The spike in new investors demonstrates that people, given access and opportunity, will take steps to participate in the equity markets, potentially benefiting from the historically higher long-term returns these markets offer,” said FINRA Foundation President Gerri Walsh. “On the one hand, this research offers the investment industry, investor advocates and policymakers critical insights about pathways to financial inclusion for all Americans and presents a roadmap to help inexperienced investors, women and people of color close the wealth gap. On the other, low levels of investment knowledge among all types of investors in the sample—new and experienced—underscore the importance of educating investors about risk and reward, costs and fees, tax consequences of investing and other key concepts.”

“In early 2020, we began seeing media narratives about an influx of investors into the market. This research moves past the anecdotes and helps to separate fact from fiction, highlighting what is actually prompting investors to open a new account,” said Mark Lush, manager and behavioral scientist in the Behavioral and Economic Analysis and Decision-Making (BEAD) team at NORC. “The reality is that investors who opened their first taxable investment account during 2020 were more racially/ethnically diverse when compared to investors already in the market. Our study also found that many of these new investors were prompted to open their account because of the ability to invest with a small amount of money. Taken together, we may be witnessing a shift towards more equitable investment participation.”

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 percent); Experienced Entrants who opened a taxable investment account during 2020, and also owned an existing taxable investment account opened before 2020 (19 percent); 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 percent).

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

• The largest portion of African American investors (17 percent) were New Investors, and the largest share of Hispanic/Latino investors were concentrated in both the New Investors (15 percent) and Experienced Entrants (17 percent) groups.
• New Investors held smaller balances in their taxable accounts when compared to other investors. Also, 23 percent of female investors reported balances under $500, compared to 15 percent 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.

About NORC at the University of Chicago

NORC at the University of Chicago is an objective, non-partisan research institution that delivers reliable data and rigorous analysis to guide critical programmatic, business, and policy decisions. Since 1941, NORC has conducted groundbreaking studies, created and applied innovative methods and tools, and advanced principles of scientific integrity and collaboration. Today, government, corporate, and nonprofit clients around the world partner with NORC to transform increasingly complex information into useful knowledge. www.norc.org

About the FINRA Investor Education Foundation

The FINRA Investor Education Foundation supports innovative research and educational projects that give underserved Americans the knowledge, skills and tools to make sound financial decisions throughout life. For more information about FINRA Foundation initiatives, visit www.finrafoundation.org.

About FINRA

FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.