Small investors loom large on Wall Street
The number of individuals investing in the stock market is finally growing large enough to gain the respect of big institutions and financial services companies.
Wall Street is giving individuals unprecedented access to new and potentially lucrative investments. Small-scale investors are now able to buy stock in initial public offerings, trade during after-hours sessions, and access detailed securities information--investment practices that used to be the exclusive domain of financial institutions.
"Where there may have been lip service paid to the individual investor before, institutional Wall Street is catching up and rolling out products and services," said Eli Neusner, a senior analyst with MetaMarkets.com, a mutual fund that displays its trades in real time.
The growing body of retail investors is making its mark on Wall Street. Investments from individuals have resulted in a higher trading volume for small capitalization stocks and even an added stability to the larger market, some analysts say.
Wall Street has rolled out a plush welcome mat for individuals. Two weeks ago, the Securities and Exchange Commission mandated what has been perhaps the biggest boon for the individual investor in passing a "fair disclosure" rule.
The SEC gave all investors--at least in theory--the same access to information as portfolio managers. The new rule requires companies to disclose market-moving information publicly, rather than selectively, to influential analysts or institutional investors.
Another boost for novice investors: By Sept. 5, stock markets will begin displaying stock trades in decimals rather than fractions, making stock prices easier to understand. Advocates also say that decimals will reduce the spreads between "bid" and "asked" prices, leaving more money for the investor.
Online brokerage firms such as E*Trade, Datek Online, Charles Schwab and Ameritrade have been tapping the individual investor market for about five years, letting the small investor with as little as $1,000 trade individual stocks.
Some of these companies also let their customers trade stocks after the market closes. Recently, Charles Schwab agreed to open before-market trading--a privilege that had been limited to institutional fund managers.
An insurgence of personal finance Web sites is targeting this same audience, offering real-time stock quotes, portfolio tracking devices, news and analyst reports.
Services for the individual investor do not stop there.
• Selective investment banks, including WR Hambrecht, use an auction-like process for selling IPOs and corporate bonds, which can include individual investors. At selected investment banks, anyone with about $2,000 to spend can bid for an IPO side-by-side with institutional fund managers.
• Mutual funds, known as Exchange-Traded Funds, are now pricing throughout the day so investors can buy or sell at any time, rather than once a day. And companies such as MeVC.com are letting regular people invest in start-ups, a privilege previously limited to just the venture capitalist or the very wealthy.
It's easy to see why Wall Street and financial services companies have begun catering to the little guy.
Squeaky wheel gets the grease
The ranks of individual investors' online brokerage accounts are expected to balloon to 28.7 million by 2003, worth a combined $3.5 trillion. This is up from 12.7 million online accounts worth $875 billion in 1999, according to International Data Corp.
Individual investment accounts topped $1 trillion for the first time in the first quarter of 2000, according to a report by US Bancorp Piper Jaffray. By comparison, Morningstar estimates the combined asset value of U.S. open-end mutual funds is $4.73 trillion.
"It's such a potentially big revenue stream; there is an economic incentive to opening up the sector to the retail investor," said Jonathan Steinberg, CEO of Individual Investor Group. "Institutions can't help but think if it was opened up to them there would be money to be made there."
While the actions of a single investor go unseen, the collective group has managed to make its mark on Wall Street.
They often provide a ready market for inexpensive, small capitalization stocks not widely traded by fund managers. These stocks can now "get a boost from day traders and message board posters," Neusner said.
Other analysts suspect that the retail investor acts as a stabilizing force in the larger markets. Some say that the turbulent swings of the Nasdaq Stock Market in the spring would have been even wilder had it not been for the general optimism of individual investors.
"(The market) has been more resilient because the sentiment (of the individual investor) has not been to run and hide during the market downturns," said Shaw Lively, an online investing analyst with IDC. "There seems to be enough size to the individual market that they can affect which direction the market goes."
The number of retail investors is expected to continue to grow and diversify, and Wall Street institutions are likely to respond with more services that cater to them.
The number of households that trade stocks and have annual incomes of $30,000 to $50,000 will nearly double from 1998 to 2003, according to Jupiter Communications.
And the more than 20 million people expected to trade online by 2003 will be a less homogenous group than the traditional individual investor: a 45-year-old, middle-income man.
"There is not a single demographic anymore," Lively said. "The historical demographic is quickly changing to include the retiree investing market and females."
Thanks to online financial services sites that provide Internet users with up-to-the-minute broker reports and other investment information, many individuals have become as investment savvy as professional traders.
"I think a sophisticated individual who is spending all their time managing money can have almost the same degree of resources that a money manager can," said portfolio manager James Oberweis.