retail investor

What is a retail investor?

A retail investor, also known as an individual investor, is a non-professional investor who buys and sells securities or funds that contain a basket of securities, such as mutual funds and exchange-traded funds (ETFs).

Retail investors execute trades through traditional or online brokerage firms or other types of investment accounts. Retail investors buy securities for their own personal accounts and typically trade for much smaller amounts than institutional investors. Institutional investor is an umbrella term for large-scale investments made by professional portfolio and fund managers who may manage mutual funds or pension funds.

key takeaways

  • Retail investors are non-professional market participants who typically invest less than large institutional investors.
  • Retail investors may pay higher fees and commissions due to the smaller trade sizes, although some online brokers offer free trades.
  • The retail investing market is huge because it includes retirement accounts, brokerage firms, online trading, and robo-advisors.

Understanding Retail Investors

Retail investors typically buy and sell in the stock and bond markets and tend to invest much less than large institutional investors. However, wealthier retail investors now have access to alternative investment categories such as private equity and hedge funds. Most retail investors may have to pay higher fees or commissions for their trades due to their small purchasing power, although many brokers have eliminated fees for online trades.

The Securities and Exchange Commission (SEC) is responsible for protecting retail investors to ensure that markets operate in a fair and orderly manner. The SEC helps retail investors by providing education and enforcing regulations to ensure people remain confident and comfortable investing in the marketplace.

Retail investors have a significant influence on market sentiment, which represents the overall tone of financial markets. Predictors of investor sentiment include mutual fund flows, the first-day performance of initial public offerings and survey data from the American Association of Individual Investors, which asks retail investors what they can expect from the market. Stockbrokers such as TD Ameritrade and E*TRADE also track sentiment.

Criticism from retail investors

Critics say smaller investors don’t have the knowledge, discipline or expertise to research their investments. Investors who make small transactions are sometimes derogatoryly called pikers.

As a result, they undermine the role of financial markets in allocating resources efficiently; and through crowded trades, they cause panic selling. These immature investors are said to be susceptible to behavioral biases and may underestimate the mass forces driving the market.

retail investment market

The U.S. retail investment market is significant in size and scope, and according to the SEC, by 2020, “U.S. households own $29 trillion worth of equities—more than 58% of the U.S. equity market—directly or indirectly Through mutual funds, retirement accounts and other investments.”

“43 million U.S. households have retirement or brokerage accounts. As of 2018, 56 million U.S. households (44% of all households) own at least one U.S. mutual fund.”

While Americans leaned toward savings accounts and passive investing after the 2008 financial crisis, the number of households owning stocks has increased since then. According to the Federal Reserve’s survey of consumer finance, about 53% of households held stocks in 2019, and 70% of middle- and upper-income households held stocks.

Unlike institutional traders, retail traders are more likely to invest in stocks of smaller companies because they can have lower price points, allowing them to buy many different securities in sufficient quantities to achieve a diversified portfolio .

Retail investors now have access to more financial information, investment education and trading tools than ever before. Brokerage fees have fallen, and mobile trading enables investors to actively manage their portfolios from a smartphone or other mobile device. A large number of retail funds and brokers have a minimum investment amount or minimum deposit of a few hundred dollars, while some ETFs and robo-advisors do not. However, as investing becomes democratized, it’s still about doing your homework.

corporate investor

Institutional investors are big players in the market moving large sums of money. Examples of institutional investors include:

  • Pension funds
  • Mutual Fund
  • money manager
  • insurance company
  • investment bank
  • business trust
  • University or college endowment
  • Hedge Fund
  • Private Equity Firm or Investor

Institutional investors account for a large portion of the New York Stock Exchange (NYSE) trading volume. They move large blocks of stocks and have a huge impact on the movement of the stock market. Because they are considered knowledgeable and sophisticated investors and therefore less likely to make uneducated investments, institutional investors are less subject to the protective regulations the SEC provides to your average everyday investor.

The funds used by institutional investors are not actually funds owned by the institutions themselves. Institutional investors typically invest for others. If you have a pension plan, mutual fund, or any type of insurance at work, you actually benefit from the expertise of institutional investors.

Related Posts

1 of 2,105

Leave A Reply

Your email address will not be published.