Attracting and managing private investors

The increasing complexity of asset selection has put both asset managers, especially securities dealers, and investors in the global capital market under pressure. It has thrown the concept of sustainable investing into the start of a backlash. A definitive survey by PwC Global of 750 institutional investors and 10,000 private investors in the years 2017-2021 with the title: “Revolution in asset and asset management: Investors’ perspectives – Rethinking purpose and performance” is informative. Retail investors are now more concerned about how their capital is being managed by asset managers. They care more than just social responsibility and other non-financial aspects of investing. They examine the business activities of companies with a special focus on costs and efficiency. They keep their eyes on determining asset managers’ ability to generate alpha returns. The survey culminated in PwC’s creation of the Investor Alignment Index, which measures the discrepancy between investor expectations and asset manager performance. This showed the extent to which investors place more value on the macroeconomic and political environment than on the expected return. This is not rocket science as the nature of an operating environment ultimately determines the risk-return exchange.

A retail investor is characteristically a person who buys and sells shares through a professional securities dealer. But in the current age of digitization, some private investors conduct their business via online brokerage platforms or other investment accounts. Although institutional investors determine the direction of the market by controlling significant holdings, there is an increasing impact on the equity markets from retail investors. They use social media platforms to monitor and coordinate their portfolio strategies. Private and institutional investors are also ensuring increasing trading volumes. Clever ones use leverage to speculate on individual companies, while those in the derivatives trading market hedge themselves with call and put options. This strategy pays off when the price of the underlined asset rises or falls.

High wealth retail investors channel their transactions through broker accounts, making it easy for them to leverage in the form of margin. In advanced economies such as the United States, the equity culture is widespread while the presence of retail investors is substantial. For example, the Russel 3000 US News & World Report says retail investors account for 10 percent of daily trading in the broadly based US stock index. US retail debt last year was $ 750 billion, adjusted for inflation, its highest level since 1997. Earlier this year, the increase in trading volume for call options on both small and large stocks in the US was reflected in the Retail investor activities. Private investor participation in Nigerian Exchange Limited (NGX) is on a sustained upswing as technology has further democratized trading processes and makes the market more attractive to millennials. Last year, for example, private investors contributed 29 percent to share transactions. NGX has continued to focus on investor education in order to expand its shareholder base, with retail investors accounting for approximately three million out of a population of 200 million. Investor education in Nigeria is heavily supported by the Chartered Institute of Stockbrokers and the Association of Securities Dealing Housed of Nigeria.

The latest in NGX’s suite of strategies to attract retail investors was last month’s webinar on “Sukuk and Green Bonds: More Than Just Investing”. Likewise, NGX only launched its upgraded version of X-Mobile last week, of which Chief Executive Officer Temi Popoola said “Capital market players and potential investors would have the resources they need to become more involved to deal with the market. The app, which was launched for the first time in 2019, is intended to “enable market participants, in particular private investors, convenient, faster and timely access to information about NGX, their listed securities and holders of trading licenses”. The Securities and Exchange Commission has always denounced a low level of participation by private investors in the market. But the Commission should also find more innovative ways to attract retail investors to the market. However, attracting investors is generally not a tea party in the global world. Enlightened private and corporate investors are not deterred by a charged curriculum of investor education programs, the media hype about delicious returns in the market, and the use of modern technology, among other things. There are fundamental questions that they consider too sacrosanct to ignore before making a final decision to invest in the capital market. They are concerned about the perceived lack of transparency, price manipulation, inadequate company disclosure, insider trading, fears of acquisitions and mergers of publicly traded companies, issues with trade settlement mechanisms, and handling of investor complaints. These issues should be tackled head-on by securities markets around the world and communicated through investor training to ensure investor confidence.

Private investors have their feet made of clay. Many small wealthy investors, especially in emerging markets, have no investment goals, nor do they lack basic knowledge of risk tolerance and time horizon. This group of private investors generally does not seek professional advice from securities dealers. They often play short term in the capital markets and expose themselves to all forms of investment risk, including mismatch – by taking out short term loans to invest in long term assets to become millionaires instantly. In Nigeria, some retail investors had lost their large inducements to the market due to the expectation of exponential returns. The stock market is no avenue for Ponzi schemes that cheat investors by promising huge, risk-free returns. It is an organized market and a proxy for the perfect market in business. The market is heavily regulated to build investor confidence. Securities dealers who flatter an investor with the assurance of huge returns lose their trading license. They can only offer investment advice based on the information available. Small investors with little wealth do not understand that the amount of their own investment determines the return. This partly explains why they often forego dividends before the era of electronic payments. They dominate the unclaimed dividend list today. Small net worth retail investor accounts are the most difficult for trading member firms to manage due to the burden of irrelevant questions and unrealistic expectations. Ironically, such accounts generate the lowest returns for the homes. Experience shows that investors with a low share volume are the loudest voice at company general meetings. Some of them even put corporate governance management on their toes. But it’s an empty vessel game that makes the loudest noise. The majority of low-net worth companies take a buy-and-hold attitude, always waiting for a dividend to be announced. It was only when regulators eased some of their excesses in Nigeria that wealthy private investors expect listed companies to give them gifts at every general meeting, excluding their meager dividends. But every market needs small investors. You are the necessary evil. The high net worth among them are more active in speculation and, to a certain extent, provide liquidity. Small investors generally strengthen the shareholder base. This is the psychology of retail investors. Regulators and capital market operators should continue to develop more innovative strategies to attract retail investors to the securities market.

  • Oni, a chartered stockbroker and commodities broker, wrote from Anthony Village, Lagos

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