Approximate read time: 11 minutes

On 3 February 2025 the House of Lords is due to consider the following question for short debate:

Lord Lee of Trafford (Liberal Democrat) to ask His Majesty’s Government what plans it has to encourage first-time investors in the stock market.

1. How retail investment in the stock market works

Individuals, known as ‘retail’ investors, can invest in the stock market by buying shares in companies directly or through funds that are professionally managed. Funds can be ‘passive’ or ‘active’.[1] Passive funds aim to match the performance of a particular stock market index, often by investing in every share in the index being tracked. These are sometimes known as tracker funds. An example of a common index tracked by passive funds is the FTSE 100, a list of the 100 biggest companies in the UK. An advantage of tracker funds is that they typically attract low fees. Active funds are managed by a professional who chooses the underlying investments. These aim to outperform the market and other active funds. They are usually subject to higher fees than passive funds. Both active and passive funds can be orientated towards either income or asset growth.

Companies will often pay dividends to shareholders. These can be taken by the owner as cash income, or reinvested. Investors can also target companies that do not pay significant dividends but which the investor predicts will grow in value, returning a larger profit when the stocks are sold.

2. Retail investors

A survey commissioned by the industry body the Investment Association, and carried out by polling company Ipsos, found that in 2023 39% of UK adults were actively investing.[2] This includes investments in bonds, cryptoassets and other types of investment in addition to the stock market. Similarly, the Financial Conduct Authority’s (FCA) 2022 ‘Financial lives survey’ found 37% of adults held any investment product (excluding property) in May 2022.[3]

The Investment Association found that UK investors were younger than the wider population, with just under half (42%) aged 18–35.[4] A higher proportion of investors are men than women, at 63% compared with 37%. The proportion of retail investors classified as being from ethnic minorities corresponds approximately with the population in England and Wales; 17% of retail investors are from ethnic minorities compared to 18% identifying as Black, Asian, or from a mixed or other ethnic group in England and Wales.[5] 18–24 year old investors are the most diverse group, with 32% from non-white backgrounds.

There was an increase in the proportion of people investing during the Covid-19 pandemic. The Investment Association found that approximately a third of the 39% of adults actively investing started to do so during the pandemic.[6] The FCA found that the percentage of people holding investments grew from 33% in February 2020 to 37% in May 2022.[7] There was a significant increase in the number of younger adults investing.[8] In February 2020, 19% of 18–34-year-olds had investments; by May 2022 this proportion had increased to 29%. A survey conducted for the Halifax bank found that having more time to research options was an enabling factor for a quarter of new investors.[9] Having more money as a result of the restrictions was also a factor for approximately 17%.

The FCA states that, on average, new young investors tend to have higher risk appetites than other investors. For example, 16% said they have a moderate to high willingness to take risk when investing, compared with just 4% of new investors aged over 55 and 12% of all investors. This is reflected in the increase in investments in cryptoassets, a high-risk investment. Between February 2020 and May 2022 there was an almost threefold increase in the proportion of adults holding cryptoassets, from 2% (1 million people) to 5.8% (3.1 million people).[10] Younger investors (18–24) are more likely than older ones to invest in cryptoassets: 46% report holding cryptocurrencies, compared with 7% of investors aged 55–65.[11] The Investment Association found that younger investors view cryptoassets as a core part of their portfolios and peer influence plays a key role in adoption.

However, young people also make more traditional investments; 44% of young investors hold a stocks and shares individual savings account (ISA) and 38% invest in funds.[12] Older customers are often advised to invest in bonds rather than stocks because they are investing for the short- to medium-term rather than the long term.[13]

The average fund holding period for retail investors was 3.6 years in 2023.[14]

3. Retail markets

In 2022 the majority of shares in UK quoted companies by value were held by investors outside the UK, at 57.7%.[15] In addition, 10.8% of UK quoted shares were held by UK individuals, as opposed to institutions, at the end of 2022, a decrease of 1.2% from 2020. The Office for National Statistics states that the proportion UK shares being held by UK individuals has been relatively stable in the decades following a decrease at the beginning in the 1960s, before which time individuals owned the largest proportion of UK quoted shares.

As well as more overseas investors holding equity in UK companies, UK investors have been shifting their investments to other markets.[16] The percentage of ‘funds under management’ (FuM), a measure of how much money fund managers invest on clients’ behalf, going to UK companies declined from 29.6% in 2008 to 11.5% in 2023, while the proportion going into overseas equities increased from 28.1% to 42%.

In 2023 net retail sales in FuM (of which approximately half were in stocks) were negative, meaning non-institutional investors withdrew more money than they invested.[17] The Investment Association explains this was due to higher interest rates both making cash savings more attractive and the increasing costs of servicing mortgages and credit cards:

Net retail sales were -£24.3bn in 2023 as retail investors grappled with the impact of higher interest rates. Higher cash savings rates drew some capital away from funds and for many investors, monthly expenditure on paying off mortgages and credit cards increased affecting the ability of some to save and invest.[18]

4. Impact of retail investment in the stock market

When a company issues shares for the first time, in an initial public offering (IPO), it can use the profits to finance expansion or a new development, or to move into overseas markets.[19] After the IPO, shares can then be traded on secondary markets. Prices can go up and down depending on the perceived strength of the company.

The price of a company’s shares on the secondary market can impact its ability to raise further finance.[20] If the company wants to take out a loan, the creditor might use the share price as an indicator of the financial health of the company and therefore give more favourable terms if the share price is high. A company may also be able to issue further shares if its share price is high. It can then use the money raised to further invest in and expand the business.

Equity investments can benefit the customer if they receive dividends or if they are able to sell the stock at a higher price than they bought it for, or both.[21] However, investing in the stock market carries risks for consumers. Retail investors are often advised not to buy shares unless they can afford not to access that money for more than five years, to give stock prices time to recover if they should fall. In addition, a company’s share price can drop significantly and not recover, or the company can fail. Retail customers will also usually pay some fees, even if their investments do not do well.

5. Barriers to investing

The FCA’s 2022 financial lives survey found that many people had little or no money available to invest: in May 2022 between 7% and 10% of adults had no investible assets whatsoever, and a further 15% to 20% had between £1 and £1,000.[22] While some households increased their savings during the Covid-19 pandemic, “adults with less than £15,000 in household income saw no improvement in their savings in the two years to May 2022”.[23]

However, there are “a significant proportion of wealthier adults” that the FCA states are “holding far more money in cash than is likely to be needed for an emergency savings buffer”.[24] For example, in 2022 58% of adults with investible assets of £10,000 or more held all or at least three quarters of these assets in cash. These people could “potentially make their money work harder if they engage more with their finances and consider investing”.

The FCA suggests that low ‘financial capability’ acts as a barrier to investing for these people. It found that among people not receiving financial advice who had £10,000 or more in cash:

  • just one in ten (9%) had seriously considered investing before
  • almost half (46%) believed they do not have enough money, or their financial affairs are too straightforward to consider investing
  • almost one third (31%) said they do not know enough about investments or would require support, if they were to invest in the future
  • one third (33%) did not know that money in cash savings tends to decrease in value over time because inflation normally outpaces interest rates
  • one sixth (16%) believed that cash ISAs and stocks and shares ISAs have performed about the same, on average, over the past 10 years—and a further three fifths (62%) did not know enough to have an opinion about their relative performance[25]

6. Proposals to encourage investment in the stock market

The government allows UK residents to invest up to £20,000 every year without paying taxes on income or capital gains through a stocks and shares ISA.[26] The previous, Conservative government proposed an additional tax-free allowance of £5,000 if this was invested in the UK, termed a ‘British ISA’.[27] In the autumn 2024 budget, the Labour government said it would not proceed with the British ISA “due to mixed responses to the consultation launched in March 2024”.[28]

Lord Lee, the sponsor of the 3 February 2025 debate in the House of Lords, is described as an “active private investor” and has written columns for the Financial Times on investing in stocks, as well as books on the subject.[29] In July 2024 Lord Lee wrote an article arguing that fostering a culture and climate of business growth and greater risk-taking would help grow the UK economy.[30] He argued that financial education in UK schools was “abysmal”, suggesting the government could improve this by giving each secondary school a share of the government’s holding of the NatWest bank, which it is looking to divest. Older students would decide how the annual dividend on the shares would be spent, which Lord Lee argued would “make young people aware of the stock market, banks, dividends” and other types of investment. He said this would cost the government approximately £20mn.

His article also advocated measures to increase coverage of the stock market and UK investment opportunities on television in order to communicate the stock market to the mainstream. Finally, he welcomed the motivation behind the proposed British ISA but argued it would have been too small and “administratively cumbersome” to have made a significant impact. He proposed instead that “all future new ISAs—and any new monies put into existing ISAs—[should] be confined to UK-quoted companies”. While acknowledging this would be a “radical, potentially controversial approach”, he could not see “why we should give tax breaks to people who are, in effect, investing overseas”.

The centre-right thinktank the Centre for Policy Studies published research in 2023 arguing that both consumers and the UK economy would benefit from more investment in the stock market.[31] It recommended the government should increase retail investing by:

  • publishing a retail investment strategy
  • rethinking the disclaimers around retail investment and taking a more “realistic, and positive” attitude towards risk
  • amending the rules on financial advice to avoid “disproportionate suitability requirements” that prevent people from accessing advice
  • supporting a campaign to raise awareness of the opportunities provided by retail investing
  • requiring a proportion of new equity through IPOs to be made available to retail investors
  • ensuring people with cash ISAs are made aware of the potential returns from stocks and shares ISAs
  • creating a new national fund to invest directly in a portfolio of UK equities or operate as an index tracker for the main FTSE index, to give confidence to new investors

Cover image by jcomp on Freepik.

References

  1. Hargreaves Lansdown, ‘Different types of fund’, accessed 24 January 2025. Return to text
  2. Investment Association, ‘Investment management in the UK 2023–24: The Investment Association annual survey’, October 2024, p 72. Return to text
  3. Financial Conduct Authority, ‘Financial lives 2022 survey: Key findings from the May 2022 survey—Executive summary’, 26 July 2023. Return to text
  4. Investment Association, ‘Investment management in the UK 2023–24: The Investment Association annual survey’, October 2024, p 72. Return to text
  5. UK Government, ‘Ethnicity facts and figures’, accessed 24 January 2025. Return to text
  6. Investment Association, ‘Investment management in the UK 2023–24: The Investment Association annual survey’, October 2024, p 72. Return to text
  7. Financial Conduct Authority, ‘Financial lives 2022 survey: Key findings from the May 2022 survey—Executive summary’, 26 July 2023; and ‘Financial lives 2020 survey: The impact of coronavirus, 11 February 2021, p 52. Return to text
  8. Financial Conduct Authority, ‘Financial lives 2022 survey: Key findings from the May 2022 survey—Executive summary’, 26 July 2023. Return to text
  9. Halifax, ‘Lockdown sparks surge in young investors’, 2021. Return to text
  10. Financial Conduct Authority, ‘Financial lives 2022 survey: Key findings from the May 2022 survey—Executive summary’, 26 July 2023. Return to text
  11. Investment Association, ‘Investment management in the UK 2023–24: The Investment Association annual survey’, October 2024, p 72. Return to text
  12. As above. Return to text
  13. Motley Fool, ‘5 things to know about asset allocation’, 10 November 2023. Return to text
  14. Investment Association, ‘Investment management in the UK 2023–24: The Investment Association annual survey’, October 2024, p 72. Return to text
  15. Office for National Statistics, ‘Ownership of UK quoted shares: 2022’, 4 December 2023. Return to text
  16. Investment Association, ‘Investment management in the UK 2023–24: The Investment Association annual survey’, October 2024, p 72. Return to text
  17. As above. Return to text
  18. As above. Return to text
  19. Barclays, ‘Introduction to shares’, accessed 27 January 2025. Return to text
  20. Investopedia, ‘Why do companies care about their stock prices?’, 11 September 2022. Return to text
  21. Barclays, ‘Introduction to shares’, accessed 27 January 2025. Return to text
  22. Financial Conduct Authority, ‘Financial lives 2022’, 26 July 2023, p 70. Return to text
  23. As above, p 71. Return to text
  24. As above, p 72. Return to text
  25. As above, p 73. Return to text
  26. HM Government, ‘Individual savings accounts’, accessed 27 January 2025. Return to text
  27. HM Treasury, ‘UK ISA consultation’, 6 March 2024. Return to text
  28. HM Treasury, ‘Autumn budget 2024: Fixing the foundations to deliver change’, October 2024, HC 295 of session 2024–25, p 128. Return to text
  29. Financial Times (£), ‘John Lee’, accessed 27 January 2025. Return to text
  30. John Lee, ‘Three ideas to boost the UK's investment culture’, Financial Times (£),18 July 2024. Return to text
  31. Centre for Policy Studies, ‘Retail therapy: Making the case for wider share ownership’, July 2023, pp 4–11. Return to text