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 their trades through traditional or online brokerage firms or other types of investment accounts. Retail investors purchase securities for their own personal accounts and often trade in dramatically smaller amounts as compared to institutional investors. An institutional investor is an umbrella term for larger-scale investments by professional portfolio and fund managers who might manage a mutual fund or pension fund.

KEY TAKEAWAYS

  • Retail investors are non-professional market participants who generally invest smaller amounts than larger, institutional investors.
  • Due to their smaller trades, retail investors may pay higher fees and commissions, although some online brokers offer no-fee trading.
  • The retail investment market is enormous since it includes retirement accounts, brokerage firms, online trading, and robo-advisors.

Understanding Retail Investors

Retail investors usually buy and sell trades in the equity and bond markets and tend to invest much smaller amounts than large institutional investors. However, wealthier retail investors can now access alternative investment classes like private equity and hedge funds. Because of their small purchasing power, most retail investors may have to pay higher fees or commissions for their trades, although many brokers have eliminated fees for online trades.

The U.S. Securities and Exchange Commission (SEC) is charged with protecting retail investors to ensure the markets function in a fair and orderly manner. The SEC helps retail investors by providing education and the enforcement of regulations to ensure people remain confident and comfortable investing in the markets.

Retail investors have a significant impact on market sentiment, which represents the overall tone in the financial markets. Predictors of investor sentiment include mutual fund flows, the first-day performance of IPOs, and survey data from the American Association of Individual Investors, which questions retail investors about their expectations for the market. Sentiment is also tracked by stockbrokers like TD Ameritrade and E*TRADE.

Criticisms of Retail Investors

Critics say smaller investors do not have the knowledge, discipline, or expertise to research their investments. An investor who makes small size trades is sometimes pejoratively known as a piker.

As a result, they undermine the financial markets’ role in allocating resources efficiently; and through crowded trades, cause panic selling. These unsophisticated investors are said to be vulnerable to behavioral biases and may underestimate the power of the masses that drive the market.

The Retail Investment Market

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

"Forty-three million U.S. households hold a retirement or brokerage account. Fifty-six million U.S. households (44% of all households) own at least one U.S. mutual fund" as of 2018.

And while Americans gravitated to savings accounts and passive investing in the aftermath of the 2008 financial crisis, the number of households that own stocks has risen since. According to the Federal Reserve’s survey of consumer finances, about 53% of families owned stocks, and 70% of upper-middle-income families owned stocks in 2019.

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 an adequate number of shares 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 decreased, and mobile trading has enabled investors to actively manage their portfolios from their smartphones or other mobile devices. A huge range of retail funds and brokers have modest minimum investment amounts or minimum deposits of a few hundred dollars, and some ETFs and robo-advisors don’t require any. Nevertheless, as democratized as investing becomes, it is still all about doing your homework.

Institutional Investors

Institutional investors are the big players in the market who move big money. Examples of institutional investors include:

  • Pension funds
  • Mutual funds
  • Money managers
  • Insurance companies
  • Investment banks
  • Commercial trusts
  • Endowment funds for a university or college
  • Hedge funds
  • Private equity firms or investors

Institutional investors account for a significant amount of the trading volume on the New York Stock Exchange (NYSE). They move large blocks of shares and have a tremendous influence on the stock market's movements. Because they are considered sophisticated investors who are knowledgeable and, therefore, less likely to make uneducated investments, institutional investors are subject to fewer of the protective regulations that the SEC provides to your average, everyday investor.

The money that institutional investors use is not actually money that the institutions own themselves. Institutional investors generally invest for other people. If you have a pension plan at work, a mutual fund, or any kind of insurance, you are actually benefiting from the expertise of institutional investors.


(Article source from: https://www.investopedia.com/terms/r/retailinvestor.asp)

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