The growing and important retail investor base

In the dynamic realm of the Philippine Stock Exchange (PSE), retail investors who may be described as ordinary individuals engaging in stock investments, play an indispensable role in contributing to market vibrancy and diversity. This article explains the significance, challenges and prospective avenues for the enhancement of retail investors, aiming to extract actionable insights to further improve their engagement and create a more inclusive and robust market.

Understanding retail investors

Retail investors, who represent individual stakeholders investing personal funds, are different from institutional investors who operate on behalf of a variety of entities such as: pension funds, insurance companies, mutual funds, investment banks, asset management firms and sovereign wealth funds. Their independent investment decisions reflect varied objectives, risk appetites, and financial capacities.

Retail investors enjoy greater autonomy, allowing for quicker investment decisions while institutional investors are subject to stringent management approval processes and organizational mandates.

Retail investors’ influence and trends

Despite their individually smaller scale compared to their institutional counterparts, retail investors collectively possess notable influence in the market. According to published PSE reports, retail investors accounted for an average of 21 percent of the total value turnover for the past three years (2021 to 2023), playing a significant role in maintaining market liquidity and aiding in price discovery.

Rise of retail investors in the market

The local retail market has witnessed a remarkable surge in recent years, indicative of improving investor affluence. According to the Stock Market Investor Profile (SMIP) report published by PSE in May 2023, local retail accounts witnessed a significant increase, reaching 1,680,572 in 2022 compared to 1,062,647 in 2018, showing a 58 percent increase.

Moreover, there has been a notable rise in online accounts which represents 73.5 percent of total stock market accounts, totaling 1,258,907 in 2022 from 625,763 in 2018, representing a 101 percent increase. Of the total online accounts, 98.6 percent are local.

Income levels and market participation

Analyzing income levels reported by the SMIP report provides additional insights into this surge, with 54 percent of investors reporting incomes less than P500,000 annually, highlighting the diverse income distribution among local investors. Additionally, according to the Philippine Statistics Authority’s Household Income and Expenditure Survey conducted in 2022, the median household income in the Philippines increased by 5.7 percent compared to the previous year, reaching P270,000 annually.

Over the past five years, from 2017 to 2022, the survey indicates a steady upward trend in median household income, with an average annual growth rate of approximately 4.2 percent. This sustained growth suggests improving economic conditions and increasing purchasing power among Filipino households. Consequently, there is a likelihood of increased participation in the stock market among Filipino households, as individuals may seek investment opportunities to grow their wealth further.

Stability of retail investors

The COVID-19 pandemic undoubtedly impacted global markets, but local retail investors in the Philippines demonstrated remarkable stability in their participation, maintaining a consistent presence.

According to reports from the PSE, while their total value turnover decreased from P1.3 trillion in 2021 (29.90 percent of total value turnover) to P0.5 trillion in 2023 (16.50 percent of total value turnover), local retail investors continued to play a notable role in the market. This stability reflects their confidence and long-term commitment to the Philippine economy, even amidst global challenges.

It is crucial to remember that the data showing a decline in turnover for local retail investors should not be solely interpreted as negative. This change must be considered within the broader economic climate shaped by the pandemic. Factors like cautious investment strategies or shifting priorities could contribute to the decrease.

Interestingly, the PSE data also reveals a significant decrease in foreign institutional participation, dropping from P1.5 trillion (33.80 percent of total value turnover) in 2021 to P1.2 trillion (40.40 percent of total value turnover) in 2023.

Despite these shifts, the steadfastness of local retail investors during challenging times serves as a positive indicator for the future of the Philippine stock market. Their continued faith in the market’s potential for growth and stability, coupled with the growing local institutional presence, paints a promising picture for the long term.

Challenges and opportunities for retail investors

Retail investors play a crucial role in driving liquidity and market activity, yet they encounter significant obstacles that hinder their participation. According to a study conducted by the World Bank, nearly 65 percent of Filipinos have limited financial literacy, impeding their ability to make informed investment decisions.

Moreover, accessibility to financial services remains a challenge, particularly for individuals in rural areas, with over 40 percent of the population lacking access to banking services (Philippine Statistics Authority, Financial Inclusion Report, 2022). Additionally, the complexities of technology pose a barrier, with only 30 percent of Filipinos having internet access, limiting their ability to utilize online trading platforms effectively (National Telecommunications Commission, Internet Penetration Report, 2023).

Another challenge would be the mindset that only the wealthy can invest in the Philippine stock market. This held some truth in the past due to high minimum investments and limited financial literacy, but the landscape is slowly changing. The rise of online platforms has lowered the barriers to entry and initiatives by local financial institutions are promoting public participation. While full financial inclusion remains a work in progress, more Filipinos are recognizing the potential of the stock market.

To address these challenges, educational initiatives are essential. By providing accessible financial literacy programs and simplifying the process of opening brokerage accounts, more individuals can confidently participate in the market.

This is further supported by efforts from local brokerages, such as BDO Securities, who have made strides in democratizing financial information through initiatives such as TradeTalks webinars and investor briefings. These are accessible to all and provide engaging social media content. They also have useful resources on their website, such as educational articles and videos on a range of topics from online trading platform navigation to investing tips. For their clients, BDO Securities offers added benefits in the form of research reports and market-related email blasts, providing unique trade/investment ideas and insights into market trends. In addition, the BDO Foundation has conducted financial literacy programs. Such initiatives can further empower retail investors to navigate online trading platforms efficiently. Through these collective efforts, the PSE can promote inclusivity and broaden participation, ultimately contributing to the growth and stability of the market.

As the PSE evolves, the increasing influence of retail investors becomes more apparent. Enhancing market transparency and fortifying investor protection mechanisms are crucial steps in fostering trust and confidence among all participants. Through concerted efforts to address challenges and cultivate opportunities, stakeholders can collaboratively build a more inclusive, equitable, and resilient market ecosystem, ensuring that retail investors can fully participate and benefit from the opportunities offered by the stock market.

Co-written by Eduardo Francisco and Joseph Reyes. Francisco is president of BDO Capital & Investment Corp. and vice chairperson of the Shareholders’ Association of the Philippines. Reyes is an associate in BDO Capital.

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