By Benjamin Nathan OTCHERE
Expanding retail investor participation in a stock market is crucial for a nation’s financial ecosystem. When retail investors are engaged, markets tend to be more vibrant, diversified, and resilient.
However, ensuring sustained engagement requires understanding the success factors seen in advanced stock markets and adapting those to the Ghanaian economy and I believe that’s what we need as a country. Below is an expanded analysis with practical examples from developed markets and evidence from academic studies.
Financial Literacy Initiatives
One of the primary barriers to retail participation is the lack of financial literacy, which affects investors’ confidence and ability to make informed decisions. Advanced markets have adopted comprehensive financial literacy programs, often integrating them into school curriculums or providing resources via government and private organizations. For instance, in the United States, the Financial Literacy and Education Commission (FLEC) collaborates with private firms and nonprofits to educate citizens on investment basics.
As Lusardi and Mitchell (2014) found, “improving financial literacy correlates directly with increased market participation, as individuals gain the confidence to engage in equity investments.”
Japan’s approach to financial education is another example. The Bank of Japan’s Central Council for Financial Services Information offers resources on budgeting, investment, and retirement planning, specifically targeting young adults and students.
These programs have resulted in measurable increases in market participation over the last decade, reflecting how ongoing education efforts can yield long-term market benefits.
Regulatory Framework and Market Access
Effective regulatory frameworks in advanced stock markets highlight the value of creating a retail-friendly environment. In the U.S., the Securities and Exchange Commission (SEC) enforces transparency and accountability for listed companies, bolstering investor confidence. The SEC’s Regulation Best Interest (Reg BI), introduced in 2020, mandates brokers to prioritize client interests, enhancing trust among retail investors. O’Hara (2018) affirms that “retail-friendly regulatory frameworks reduce market friction, fostering stock market accessibility.”
Similarly, the European Union’s Markets in Financial Instruments Directive II (MiFID II) has revolutionized retail investor engagement by standardizing disclosures and improving transaction transparency. Research by Schulz and Hartmann (2020) shows MiFID II led to a 20% rise in retail trades, demonstrating how effective regulation can drive participation. Such frameworks provide valuable lessons for emerging markets seeking to strengthen retail investor confidence and engagement.
Technological Advancements and Accessibility
Technology plays a transformative role in lowering entry barriers for retail investors. The United States, in particular, has seen an unprecedented rise in retail investment due to the popularity of online trading platforms. Companies like Robinhood pioneered commission-free trades, making stock trading more affordable and accessible. This trend has spread to other markets, with online brokers in Europe and Asia following suit. According to Kumar et al. (2020), “the democratization of trading through technology has been instrumental in boosting retail market participation in advanced economies.”
Another noteworthy example is in Hong Kong, where the Stock Exchange introduced the HKEX Orion Trading Platform. This high-speed, efficient trading system allows retail investors faster and more transparent access to market data and trading activities. Following the platform’s implementation, Hong Kong saw a significant increase in retail trading activity, emphasizing the importance of technology in fostering market vibrancy (Lee & Chan, 2021).
Product Diversity and Fractional Shares
Retail investors benefit from investment options that align with their risk tolerance, investment horizon, and financial goals. Advanced markets like the U.S. and U.K. have developed a diverse range of financial products for retail investors, including exchange-traded funds (ETFs), Real Estate Investment Trusts (REITs), and fractional shares.
In Ghana, we have one ETF and about two REITs operational at the moment. Our market needs more of this product to meet diverse type of investors. Let me mention that Fractional shares, in particular, have been instrumental in attracting retail investors, as they allow individuals to purchase portions of high-value stocks like Amazon or Tesla. Ghana could also have fractional shares on the high value stocks on the GSE to attract investors. In this regard financial education should not be relegated.
Fractional share offerings have been impactful, as evidenced by the significant increase in small-cap investments on U.S. stock exchanges. Research by Zhang et al. (2021) demonstrates that “the option to buy fractional shares lowers the financial barrier to entry, making stock markets more inclusive and accessible for retail investors.”
Government Incentives
Governments in advanced economies often provide tax incentives to encourage retail investment. In the U.K., the Individual Savings Account (ISA) scheme offers a tax-free investment allowance, making it highly attractive for retail investors.
This initiative has boosted retail participation and, according to HM Revenue & Customs (2020), “ISAs have helped increase stock market engagement among lower-income households, broadening the market’s investor base.”
In Canada, the Tax-Free Savings Account (TFSA) allows citizens to grow investments without capital gains taxes, further encouraging participation. Evidence from the Canada Revenue Agency (CRA) shows that TFSAs have driven increased retail participation, especially among young investors, illustrating the role of tax incentives in promoting long-term market involvement (Baldwin & Lalonde, 2019).
Lessons for Ghana and Other emerging markets
Emerging markets like Ghana can learn from advanced economies to boost retail investor participation. Financial literacy programs, like those in the U.S. or Japan, can empower individuals to navigate stock markets confidently.
Tax-advantaged accounts, similar to the U.K.’s ISA or Canada’s TFSA, can incentivize savings and investments. Advanced technology, such as Hong Kong’s Orion Trading Platform, and fractional shares can make trading more accessible. These strategies, alongside supportive regulations, can foster vibrant and liquid stock markets.
Benjamin is a Certified Financial Planner/Advisor
