LPL: Retail investor Behavior And Flows
Additional content provided by Tucker Beale, Analyst, Research.
Retail investors are generally defined as non-institutional market participants who trade their own personal accounts rather than making trades as part of a larger financial institution. Retail investor influence over capital markets has increased as their collective trading makes up an increasing percentage of total volume.
The number of people opening investment accounts and doing their own trading ballooned during the pandemic. This was driven by a combination of factors, including technology and competition driving barriers to entry lower, government stimulus, and an increased collective focus on equity markets and associated media (think GameStop (GME), r/wallstreetbets, and the movie “Dumb Money” made about the meme stock frenzy). Regardless of personal opinions around the handling of the pandemic or meme stock frenzies, the net effect was a step-function increase in retail trading activity.
Retail investors as a group have unique attributes that should be considered when assessing their impact on equity markets. While all market participants suffer from behavioral biases, retail investors in aggregate may exhibit a stronger bias towards momentum. If a stock is up, retail traders view the stock as “good” and interest increases, whereas if it is down, it’s perceived as “bad” and interest sours. As an example, this was on full display during the meme stock rallies where rising stock prices spurred more investment from retail investors in a way that allowed the highest price achieved to exceed what could be justified by the fundamentals of the businesses. When excitement and headlines faded, meme stock prices fell back to more reasonable levels. If the price of a new Ford F-150 doubled with no changes in features or price increases from other brands, one would expect demand to drop. The opposite appears to be true for retail stock appetite. This, combined with a propensity to “follow the herd,” can lead to a positive feedback loop of retail buying that is concentrated in relatively few names based on a theme and less sensitive to stretched valuations.
One concern is that by driving higher valuations and more concentrated leadership in rising markets, retail investors could spur sharper drawdowns when trends reverse. Year to date, that has not played out. Retail investors as a group did not capitulate during or after the market pullback in early April and instead bought dips as they came. According to Vanda, a data provider that provides flow data by investor type, retail investors added $1.3 billion to the market each day in the first half of 2025. This represents a 32.6% increase relative to the daily averages in the first half of 2024. Should we see a more prolonged momentum unwind in the future, or a loss of belief in the themes driving markets higher (like AI), support from retail investors may not be as strong.
The Strategic and Tactical Allocation Committee (STAAC) uses flows data, how much capital is moving into or out of asset classes, aggregated by Vanda to help improve allocation decisions. By knowing which investor types are driving market moves, we believe STAAC members are better able to assess the resilience of prevailing trends. In rising markets, slowing retail flows can signal exhaustion and act as a warning sign that the prevailing uptrend may be stalling. Inversely, following moves higher off market lows driven by retail investors buying the dip (as we have seen year to date), we monitor for buying among other market participants for evidence that the new trend is sustainable and that the bottoming process is complete.
Retail investors now make up a larger percentage of total trading volumes. Technological advances that lowered barriers to entry, paired with stimulus checks and an abundance of free time during the pandemic, resulted in a sustainable increase in retail trading. Retail investors have a sensitivity to momentum, a focus on thematics, and an insensitivity to high valuations. The larger retail trading volumes become, the more these characteristics will be seen in broad equity markets, in our view.