The Iran war turned retail traders into sellers of stocks for the first time in 3 years this week

• Retail traders are a hardy bunch, but they too have been shaken by the Iran war.
• Data shows that retail traders were net sellers of single stocks for the first time since 2023 this week.
• Analysts note retail traders are diversifying, shifting from single stocks to ETFs amid market uncertainty.

Retail traders have proven to be reliable dip buyers, but the Iran war briefly turned the cohort into sellers of stocks for the first time in almost three years.

Data from research firm Vanda Research shows that retail traders on Monday were net sellers of single stocks for the first time since November 2023, with net selling totaling $20.6 million.

"On a broader basis, the trend since the start of March has been one of gradually receding retail participation, alongside systematic deleveraging and only modest buying from long-only and hedge fund investors on the other side," the firm said, adding that retail has returned to dip buying since Monday.

Adam Woodhead, a senior analyst at The Investors Centre, a broker review and comparison platform, thinks this shift in retail behavior can be directly attributed to the war in Iran.

"The clearest signal isn't just that retail investors net sold $20.6 million of single stocks—it's that this happened on a rebound day rather than during a sharp selloff," he told Business Insider. "That tells you this isn't panic, it's repositioning."

Markets were up on Monday as investors reacted to Donald Trump's comments that the US and Iran were in negotiations to end the war, which Iran denied. The roller coaster ride has continued this week, with stocks falling again on Tuesday and spiking on Wednesday after news of a 15-point peace plan boosted sentiment.

Woodhead said he doesn't think retail traders are employing their classic playbook of buying the dip on high-growth stocks or chasing rallies for one key reason: the visibility they are used to has vanished.

"Instead of consistently adding risk, investors are now using market strength to reduce exposure," he said. "That's a meaningful shift from the past couple of years, where retail flows often reinforced rallies."

In Woodhead's view, the key takeaway from the Vanda data is the broader shift in risk appetite that retail traders are exhibiting. The key signal he sees is the pullback from single-stock exposure.

Carl Hazeley, CEO of retail trading platform Finimize, also sees a shift in individual investors' behavior, though he maintains that the current trend isn't so much a direct shift out of single stocks as a reallocation.

"They're responding to the broader tone of the market, which is being shaped by volatility and uncertainty," he said. "There is a broader shift in sentiment as they diversify and take on board a mix of risks - we've seen this playbook before from retail investors; they don't sell up. They diversify, swapping the idiosyncratic risk of single stocks for ETFs."