The growing influence of retail investors

The growing influence of retail investors

Alexander Joshi, London UK, Head of Behavioural Finance

All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

A subject of increasing interest in financial markets is growing retail investor participation. Equity markets have been driven by a small selection of artificial intelligence-related stocks in recent years, exacerbated by index buying and influenced by the rise of momentum investing and quality equities being out of favour. These trends have in part been attributed to retail investors.

In developed markets, roughly half of adults are now thought to participate in capital markets, either directly or indirectly as retail investors. This expansion has been driven by the democratisation of investing: lower trading costs and minimum investment levels, commission-free trading platforms and the increased awareness of financial markets stimulated by digital and social media. The COVID-19 pandemic, with abundant liquidity, stimulus payments and more time spent online, served to accelerate these trends.

Policymakers are also encouraging greater engagement. In the UK, the Financial Conduct Authority has highlighted Barclays’ research showing that 13 million individuals hold around £430 billion in cash savings(1), arguing that a stronger investment culture is needed to improve longterm financial outcomes.

Broader participation has clear benefits, allowing individuals to protect their purchasing power from the effects of inflation and build wealth. Academic studies suggest that increased retail investor involvement can enhance market liquidity and price efficiency by increasing trading activity, narrowing bid-ask spreads and enabling faster incorporation of dispersed information into prices.

However, episodes such as the surge in activity seen during the ‘meme stock’ craze of 2021 illustrate that retail investor behaviour can also amplify volatility and momentum, increasing the importance of psychology and behavioural biases in explaining market outcomes.

What impact is this increased participation likely to have on the functioning of financial markets and, by extension, on the investment journey and the outcomes of existing investors?

The growing army of retail investors

There has been a surge in the use of trading apps in recent years (see chart), reflecting increased interest in financial markets among the public.

Source: World Economic Forum, Barclays Private Bank, January 2026. Numbers for 2024 and 2025 are estimates

Much of today’s retail investor participation occurs through commission-free trading platforms, which are able to do so through payment for order flow (PFOF). This is the compensation a broker receives for routing trades to be executed to a particular market maker. PFOF data provides clear evidence of just how much retail trading activity is growing; having risen 51% year-on-year in the third quarter of 2025 (see chart).

Brokers trading via payment for order flow have doubled since the start of 2024, completing a trend that commenced during the COVID-19 pandemic in 2020

Source: Bloomberg, Barclays Private Bank, January 2026

The influence of retail trading activity on the market has risen over the last decade (see chart). Recent estimates attribute roughly one-fifth of US equity volumes to retail flows, the most recent growth largely coming at the expense of institutional flows, including long/short hedge funds.

US equity volume segmentation estimates by investor type

Trends in equity volumes by type of investor show increased participation from the public in the markets over the last decade

It is posited that retail investors are price-trend sensitive and lean on momentum strategies. Indeed, retail portfolios show a clear bias toward stocks with momentum attributes(2), according to Empirical Research Partners. Exposure is heavily concentrated in shares that rank in the top quintile of nine-month price trends, reflecting a strong preference for trend-following strategies. Retail-heavy momentum stocks have performed exceptionally well since the pandemic, and surged since the onset of 2024.

These momentum-heavy holdings often overlap with companies that are structurally weak, including those tied to AI themes (the top quintile of retail participation has approximately twice as much relative exposure to AI names against the benchmark, based on number of stocks). While this positioning can amplify gains during rising markets, portfolios are highly exposed to sharp reversals when momentum fades. This is pertinent when the momentum stocks held by retail investors have traded significantly above the market’s multiple.

Increasing influence of passive funds

Retail flows have increasingly favoured passive funds and exchange-traded funds (ETFs) in recent years, with passive vehicles capturing most new money globally. US ETFs had record net inflows of $1.5 trillion in 2025 as retail investors gravitated toward lowcost, easily-accessible index products, at the expense of actively-managed mutual funds.

The migration away from active mutual funds reduces the influence of fundamental stock-picking and increases the weight of market-cap-based buying. As a result, rising stocks attract more passive inflows simply by becoming larger index constituents, while falling stocks are mechanically sold, creating a procyclical flow pattern that can amplify momentum.

With retail investors increasingly using ETF platforms and buying broad-market exposures on dips − as evidenced by the record US equity ETF investing − these automated, sentiment-linked flows now play a bigger role in setting marginal prices, contributing to narrower market leadership, faster transmission of retail sentiment and a more momentum-driven market structure.

Retail investors’ increased use of options has also accelerated significantly. Daily index option volume has surged to nearly five million contracts, including a record average daily volume of 862 thousand in VIX options and a record 3.9 million in S&P 500 options (of which 59% are options that expire on the same trading day, used for very short-term market moves and carry significant risk). Indeed, retail/self-directed brokers accounted for around half of daily option volume(3).

Is retail investor psychology different?

Several large-scale studies suggests that today’s cohort of investors are learning about and entering markets at a younger age, perhaps while still at university or even earlier, often before traditional life milestones (see charts).

The age you start to invest matters. Early investing experiences can shape long-term attitudes to risk and return. Those whose formative years coincided with low interest rates, quantitative easing and strong equity performance may develop different expectations from those shaped by the Global Financial Crisis, for example, which fostered far greater caution.

This seems particularly relevant in the context of current discussions around if there is an AI bubble (The psychology of market bubbles).

A notable change in the investing landscape that may create further behavioural shifts stems from the rise of modern trading platforms, with many being increasingly gamified. This is particularly relevant as younger investors are engaging more with tech- and app-based tools.

Research shows that individual investors tend to trade frequently, chase recent winners and underperform as a result(4) . Design features such as rewards, animations, social feeds and copy-trading tools can increase trading activity (social‑norm prompts encourage investors to follow popular trades) often without improving outcomes (and disproportionately attracting those with lower financial literacy)(5). These features encourage herding, recency bias and momentum-driven behaviour, increasing turnover and shortterm focus(6).

At the market level, these features can amplify volatility and create the potential for short‑term dislocations, such as rapid rallies in highly shorted stocks, spikes in options activity, or abrupt reversals which are disconnected from fundamentals. This is all occurring against a backdrop of shorter investment holding periods.

What are the implications for markets?

While it is too early to draw firm conclusions, and more data across different market environments will be needed, it is clear that the surge in retail investing is changing market dynamics at the margin.

Retail-driven flows may amplify intraday moves, create brief price distortions or lead to crowded activity around thematic stocks or options, occasionally affecting liquidity and generating short-term noise. By contrast, high-quality discretionary portfolios typically avoid such pockets of speculative excess.

Greater participation is also likely to increase mainstream media coverage of financial markets. News flow is not necessarily helpful for successful long-term investing and greater exposure to emotive or unregulated commentary can exacerbate behavioural biases.

Diversification and protecting generational wealth

For institutional or retail investors alike, diversification remains paramount. Some volatility may be more frequent or visible as the composition of market participants changes. Investors may ‘feel’ this more acutely through increased media coverage. Strong financial and behavioural foundations are therefore as important as ever.

Strategic asset allocation, disciplined rebalancing and high-quality asset selection remain among the most effective tools for preserving and growing wealth. Moreover, episodes of volatility and mispricing can create opportunities for investors able to look through short-term noise.

Where retail activity temporarily drives prices away from fundamentals, active managers may be able to add value. Today’s market, for example, provides a significant discount relative to history for quality as a factor.

Finally, as many families focus on building wealth across generations, the earlier and different ways in which younger investors engage with markets may also provide useful ground for discussion within families.

In the face of so much geopolitical noise, can the excitement over artificial intelligence keep pushing stocks to fresh highs in 2026?

Barclays Bank, The UK investment gap: £430 billion in cash savings not invested by UK adults, 11 September 2024(Return to reference)

Retail Investors: Friend or Foe?, Empirical Research Partners, July 2025(Return to reference)

Cboe, State of the Options Industry: 2025 Year in Review, January 2026(Return to reference)

Barber and Odean, The Behaviour of Individual Investors, September 2011(Return to reference)

Chapkovski, Khapko, Zoican, Trading Gamification and Investor Behaviour, November 2023(Return to reference)

Behavioural Insights Team, Gamification Revisited: New Experimental Findings in Retail Investing, October 2024(Return to reference)