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Widening retail participation in equity markets

by Maximilian Bierbaum and Sheenam Singhal

September 2023

UK capital markets

Analysis of the shifting dynamics of retail participation in European equity markets and proposals for increasing engagement.

At a time when technology should enable more people than ever before to invest in the stock market, retail engagement has fallen over the past few decades in the UK and in many European economies.  

This report measures the levels of retail participation in equity markets; outlines the potential benefits to households, the economy, and the capital markets; and makes 12 recommendations to increase retail investor engagement.

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Widening retail participation in equity markets - and why it matters

Technology should enable more people than ever before to invest more of their money, but retail engagement has fallen over the past few decades in the UK and most European countries. This may seem like a distraction at a time when millions of people are struggling with a cost-of-living crisis, but this report argues that in the long-term wider retail participation in equity markets could have a positive impact for millions of individuals and for the wider economy.

The decline in retail participation may seem surprising. Investing can be a powerful tool for individuals to improve their long-term financial security and wellbeing, and it has lower financial entry barriers than buying property. But while people can start buying shares with as little as £1 or €1, the cultural, structural, and regulatory barriers to investing in equity markets are significant.

This report - published in partnership with Euroclear and PrimaryBid - argues that there are many good reasons to change this, and technology and digital solutions put us in a good position to change it, particularly as and when we emerge from the current cost-of-living crisis. Many people want to get on the property ladder, but it is time we start talking more about the ‘equity escalator’.

The happy consequence of more people choosing (and being able) to invest more of their money is that it can have a positive impact on the economy. The social purpose of capital markets and the financial services firms that intermediate is to channel money from those that have it to those that need it. Some rightly see wider retail participation in the capital markets and improved access to funding for companies, in particular SMEs, as two sides of the same coin.

Philosophically, this would turn savers into investors, investors into owners that have a stake in the economy, and over time create people that are more engaged and more confident to take more ownership of their financial futures. The first section of this report looks at the value of retail participation in equity markets. The second section measures the levels of retail participation in selected markets. We then discuss barriers to wider retail participation and the growth potential. Finally, we make 12 recommendations for policymakers, regulators, and the industry on how to widen retail participation in equity markets and reconnect households, issuers, and the capital markets.

Here is a short summary of this report:

1) Retail participation in equity markets: in this report, we measure the levels of retail participation in equity markets in key European and global markets, discuss its value, barriers, and growth potential, and outline the main steps that the industry, regulators, and governments can take to increase retail engagement.

2) Defining ‘retail participation’: retail participation can mean a lot of different things. We focus on direct ownership of shares, but many of the themes and recommendations in this report are immediately relevant to indirect investments through investment funds and pensions and to other areas of household engagement with the capital markets.

3) The value of retail participation: widening retail participation in equity markets presents an opportunity for individuals to increase their long-term financial wellbeing, for listed companies to connect with people in a new way, and for capital markets and financial services to reconnect with millions of households.

4) In decline: the share of households in the UK that directly own stocks and shares has halved in the last two decades (from 23% in 2003 to 11% in 2022). In many EU countries such as Germany, Italy, or Poland, less than 10% of households directly owned stocks and shares in the last year.

5) The barriers: issues such as low levels of financial literacy and a lack of an equity culture in many parts of Europe are well known. These need to be addressed, but one of the biggest problems is the gap between those who engage with their money and who have a good overview of their finances and those who do not. Digital solutions and open finance paired with a public information campaign supported by government and other public authorities can help close this gap.

6) All eyes on Sweden: in many respects, Sweden is the poster child for EU capital markets. The country has a highly engaged retail investor base (22% of households directly own stocks) that is powered by high adoption levels of tech, benefits from a simple and low annual flat tax on investments, and provides a healthy ecosystem and supply of capital for SMEs planning to list. Sweden shows what a well-developed capital markets union (CMU) paired with easier cross-border investment in the EU can achieve.

7) Why now? It feels like retail investors are about to have their moment. A few years ago not a lot of people in the industry, in government, or at the regulators spent much time thinking about retail investors, but now the topic seems to be very high up everyone’s agenda. Given the cost-of-living crisis, the industry needs to clearly make the case for how it can help people.

8) Widening retail participation: there are a few essential building blocks that can help reconnect individuals and households with the capital markets, especially as we emerge from the current cost-of-living crisis. We make 12 recommendations to increase retail investor engagement and group them into four themes: i) individuals taking ownership of their financial futures ii) innovation and technology to make investing more accessible iii) providing the right incentives iv) removing structural and regulatory barriers.

9) The growth potential: if households in the UK were a bit more like their peers in Sweden or Australia and invested a quarter of their financial assets in equities and funds it would unlock an extra £740bn of capital. And if households in the EU increased their asset allocation to equities by just five percentage points it would unlock an extra €1.8tn that could support investment, innovation, jobs, and growth. These growth figures are ambitious but realistically achievable.

10) Data challenges: it is surprising how challenging it can be to find reliable figures on the levels of retail participation in different economies. Better data provided by all relevant market participants could help make a stronger case for the value of retail participation in markets and its impact on market functioning.

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