The Importance of Courting the Individual Investor.(some 48% of American households own stock, as the individual investor becomes more important in corporate financing plans)

Savvy companies know that attracting "the little guy" is a real boon to stock price stability. But the investment mix has to be just right.

Up until about 35 years ago, Wall Street treated individual investors as royalty and lavished much attention on them. However, beginning in the mid-to-late 1960s, the role of the individual investor began to wane as, over the course of the next three decades, institutional investors--mutual funds, banks, insurance companies, pension funds, hedge funds, and other entities that invest other people's money--came to dominate trading volume. Concurrent with this rise in trading volume, institutional investors fully captured the attention and adulation of Wall Street and, more germane to the current study, the companies whose stock traded on the major exchanges.

In effect, the individual investor was relegated to the status of a second-class citizen. With the exception of the scattered dividend reinvestment programs and isolated direct stock-purchase programs being initiated, marketing efforts focusing on individual investors were largely nonexistent. Conventional wisdom held by many chief financial officers of publicly traded companies was that: (1) there were too few individual investors, (2) what funds they had to invest were too small to matter, and (3) when they did invest, they ignored individual stocks, preferring to invest in professionally managed mutual funds instead.

In what can be considered a major yet largely overlooked trend, the number of people investing in the stock market is growing at a significant rate. Even though most of their investments are still being made through institutions (50.2 percent of corporate equities are held by institutions, 41.3 percent are held by individuals and nonprofits, and 8.5 percent are held by foreign investors), the potential exists for companies to capture more of these funds on a direct basis. As of 1999, more than 48 percent of U.S. households owned stock, representing a 71 percent increase over 1989. Of this total, more than 51 million individuals owned stocks of individual companies (as opposed to owning shares of mutual funds). According to Federal Reserve numbers, U.S. households have increased their stock holdings from 14 percent of financial assets in 1982 to 34 percent in 1998, while stocks as a share of total assets have jumped from 15 to 24 percent.

Why the rise in the number of individual investors? First, the bull market that began in 1990 has provided, on average, double-digit returns on investments. In 1999 alone, stocks comprising the S&P 500 Index had an aggregate return of 21 percent. Compared to the mid-single digit yields available on most certificates of deposit, stock investment represents a risk well worth taking to a growing portion of the populace. Second, over the course of the past decade, corporate America has steadily migrated from offering employees traditionally defined benefit pension plans toward offering defined contribution plans, such as 401(k)s or supplemental retirement accounts (SRAs). This gives the individual much more control and latitude in making investment decisions. In fact, some argue that the 401(k) plan may be the single most important factor in the rise of the individual investor, for it has forced people to learn about the stock market, allowed them to watch their assets grow, and made them realize what the market can do for them.