Here’s How You Can Profit From The Retail Investor Boom

If you’ve ever been to a casino, then you’ve likely heard — or, sadly, experienced — this phrase. You know the one I’m talking about.

“The house always wins.”

This, of course, means that regardless of your success, the house, or casino owners, will always net a profit.

Still, folks continue to gamble their money away, even though they know the odds are stacked against them. Perhaps it’s the thrill of the game, or an overly optimistic view that they might strike it rich with the next hand or next roll of the die.

Whatever the outcome, the house will get its cut.

This, of course, can be applied to investing in a number of ways, too. In fact, it’s one of the reasons why my colleague Nathan Slaughter recently wrote about the major opportunity in online sports betting. (You can read what he had to say here and here.)

Many people who enjoy the thrill of a casino also enjoy the thrill of the stock market. We’ve seen these folks come to the market in droves recently. And in some ways, it makes sense. The coronavirus pandemic halted sports games to bet on and casinos were shuttered. And even as those two activities are slowly coming back, don’t try to tell me that none of those $1,200 stimulus checks didn’t find their way to an E*Trade account or two.

The Retail Investor Emerges

To give you an idea of just how many new investors have flooded the market, we need look no further than brokerage firms’ daily trading activity. This metric, which goes by the acronym “DARTs”, or daily average revenue trades, has exploded in recent months.

For instance, TD Ameritrade’s DARTs for the first three quarters of 2019 averaged just above 800,000. In June its DARTs soared to more than 3.8 million. The brokerage firm also added a record 661,000 new retail accounts in the second quarter of this year. This was after the brokerage added 608,000 in the first quarter.

Looking at popular mobile trading app Robinhood, the statistics tell a similar story. The total number of equity positions held by Robinhood users jumped from around 5 million in February to more than 14 million by mid-summer.

You may have heard recently about the wild and crazy story of a group of retail investors on Reddit who took on a couple of hedge funds by buying shares of GameStop and sending the stock “to the moon”.

I won’t weigh in on the controversy right now. (My colleague Nathan Slaughter did that already— and so did Amber Hestla, here.)

But there’s little question that we’re in the midst of an epic trading boom fueled by increased retail participation in the stock market.

Some skeptics view the surge in new traders as an ominous sign… We’ve seen headlines comparing this market to that of the dot-com bubble in the early 2000s when folks were piling into internet stocks. Virtually any internet stock.

Here’s the good news: Instead of chasing the next hot stock, or trying to keep up with all these Robinhood traders, or worrying about whether your holdings are going to crash tomorrow, you can put your money on “the house.”

You see, right now, the house is happy to see all these new traders. It’s a direct beneficiary of the boom in retail trading. And it doesn’t matter whether these newly minted investors win or lose, because the house will still take its cut.

My Bet-On-The-House Pick

When you place a trade to buy 100 shares of a stock, your broker routes that order to a marketplace that has a seller for that stock. If that marketplace is owned by CBOE — which owns four stock exchanges — then your broker will pay a transaction fee to that exchange for providing the liquidity and marketplace for that transaction to take place.

Think of it like the credit card company, Visa (NYSE: V). Every time you swipe your visa card, the merchant must pay a small transaction fee to Visa for facilitating the purchase. The exchanges act in a similar fashion.

Ticker Company Name Market Cap
CBOE Cboe Global Markets 9.94B
CME CME Group 69.60B
ICE Intercontinental Exchange 63.88B
NDAQ Nasdaq 23.53B

Despite the “no-commission” trades that many brokerage firms now offer retail customers, these brokerages still must pay a fee to the exchange on which it participates.

My favorite of this group provides a marketplace for equities, options, futures, and foreign exchange instruments.

And these small transaction fees quickly add up to big revenues.. In fact, as new investors have flooded the market, it posted a 52.9% increase in revenue in the first quarter of 2020. Things didn’t slow down much in the second quarter, either… sales jumped 40%.

The beauty of providing a marketplace for these transactions to take place is that it’s also extremely profitable. In 2019, for every $1 in sales that came through the door, just over a quarter trickled down to cash flow.

Action To Take

Clearly, being “the house” is a wonderful business model. One that most folks would pay a slight premium for. But right now, my favorite is trading at a significant discount. Over the last five years, investors have been willing to pay, on average, about 32 times earnings. Today, it’s much cheaper. And it’s also cheep relative to its peers. You’ll see a similar story play out when looking at every other valuation metric.

And while I can’t tell you exactly which one of the names in this table is my favorite out of fairness to my premium Top Stock Advisor readers, the truth is you probably can’t go wrong with any of the picks over the long term. Each one offers the opportunity to pick up shares of the market’s “house” and make money regardless of whether all these new traders win or lose.

As much as I expect my favorite to be a big winner, I have to be honest… the potential upside of the picks in my latest report could be even bigger…

My latest report of Shocking Investment Predictions For 2021 is full of research that challenges the conventional wisdom. We’ve gathered our resources to think and plan for what’s next. And while we don’t have a crystal ball, many of our past predictions have come true, allowing investors the chance to rake in gains of 622%, 823%, and even 993%.

Go here now to get the details on the most controversial market calls we publish all year.