Despite the backlash to the turbulent meme stocks that rose to prominence in 2021, the retail investors who helped fuel a volatile stock market may actually be a force for good.
“I think retail investors are very good for markets,” Jan-Oliver Strych, assistant professor of finance at Karlsruhe Institute of Technology in Germany, told Yahoo Finance Live (video above). “In academic literature a long time ago, a lot of studies said they are uninformed, they are overconfident. But I think more recent research shows that they are informed, in fact.”
A December 2021 study that Strych co-authored with fellow Karlsruhe professor Felix Hüfner found that stocks likely held by retail investors had 17 percent higher liquidity and at least 24 percent lower crash risk.
“What we saw is that in times of stress, of market trauma… retail investors provide liquidity to institutional investors that are forced to do fire sales in this stressful situation,” Strych said. “By doing so, they actually decrease the impact of pressures during the pandemic.”
The results of the study were not surprising to Strych, who noted that institutional investors retreat from the market in the face of financial crises (like that brought about by the pandemic). These new retail investors helped stop the bleeding, in a sense, by buying cheap stocks which were hurt by institutional investors’ withdrawals in order to provide greater liquidity.