Table of Сontents
- What Is a Retail Investor?
- Retail vs. Institutional Investors
- How Retail Investors Shape the Market
- Who Are Individual Retail Investors?
- Advantages Retail Investors Have Over Institutional Investors
- Advantages Institutional Investors Have Over Retail Investors
- Bottom Line
The time is ideal for ordinary investors. We will define retail investors, discuss how they vary from institutional investors, and discuss what retail investors may achieve by utilizing certain technologies.
What Is a Retail Investor?
A retail investor is a non-professional who invests for their own accounts using their own finances in smaller quantities of equities, bonds, cryptocurrencies, exchange-traded funds (ETFs), or mutual funds. A retail investor can trade actively or passively using a typical or discount broker, or they can engage a financial adviser or financial planner to execute their transactions on their behalf.
Retail investors now have access to margin accounts and may trade stocks, options, ETFs, currencies, cryptocurrencies, and commodities. The U.S. Securities and Exchange Commission (SEC) regulates retail investors and establishes guidelines for people who engage in day trading, leveraged trading, private equity, hedge funds, and alternative investing strategies.
Retail investors now have easier access than ever to:
- Commission-free brokers: meaning that, while exchange-traded funds and mutual funds have expense ratios that are still charged, they do not impose their own cost for completing a trade; Charles Schwab, Vanguard, TD Ameritrade, and SoFi Invest are commission-free brokers.
- Mobile trading apps: TD Ameritrade, Wealthfront, and Interactive Brokers are several companies that offer alerts, watch lists, and updates.
- Financial and investment information: TipRanks, Quandl, Preqin, FactSet, and more businesses offer this.
- Exchange-Traded Funds and Robo advisors: Equity, bond, commodity, currency, and real estate are among the several types of ETFs; Robo-advisors include SoFi Automated Investing, Betterment, and Ally Invest Robo Portfolios.
Retail vs. Institutional Investors
An institutional investor is a professional who trades substantial volumes of securities on behalf of a company, organization, fund, or other people, as opposed to a retail investor, who is a non-professional, independent investor. Investment banks, pension funds, endowment funds, mutual funds, hedge funds, and insurance corporations are examples of institutional investors. Institutional investors, who make up a sizable share of the trading activity on the New York Stock Exchange, move millions of dollars with each trade whereas ordinary investors often transact tiny amounts (NYSE).
The following characteristics set retail investors apart from institutional investors:
Trading with their own funds
Trading on behalf of other people
have no minimum investment threshold
must have assets of more than $50 million, according to FINRA.
How Retail Investors Shape the Market
The following variables promoted an increase in the number of retail investors and their market power in the spring of 2020:
- COVID-19: forced people to stay home with time on their hands.
- Commission-free trading apps: like Robinhood were becoming popular.
- Online investing communities: sprang up such as Reddit’s popular subreddit WallStreetBets (r/wallstreetbets).
Because mobile trading applications enable regular investors to react more quickly, their trading activity might affect price changes and volatility. Online investment communities, like those on Reddit, have the power to mobilize ordinary investors, as seen in the “GameStop short squeeze” that took place in January 2021.
Retail investors on WallStreetBets noted that hedge funds and institutional investors were shorting the video game and consumer electronics firm GameStop in January 2021. (GME). When retail investors came together and started buying GameStop’s shares, its price rose to $147.98 on January 26, 2021, from a low of $2.57 in April 2020.
Elon Musk, CEO of Tesla Inc. and SpaceX, tweeted in response to that hike.
- Leveraged and inverse ETFs: Inverse ETFs, sometimes known as “short funds,” aim to offer the opposite of the performance of the index or benchmark they follow, whereas leveraged ETFs aim to deliver multiples of the performance of the index or benchmark they monitor.
- Equity-indexed annuities: a kind of fixed annuity in which the interest yield return is largely based on an S&P 500-like index of stocks.
- Reverse convertibles: a kind of bond that, on a certain date, the issuer can convert into cash, debt, or equity.
- Warren Buffett, a well-known investor, is credited with stating, “If you don’t understand it, don’t invest in it” (awealthofcommonsense.com).
Who Are Individual Retail Investors?
58 percent of American people (about 150 million) own stock, including individual shares, shares held in mutual funds, and shares held in retirement savings accounts like 401k plans, according to a Gallup study on the economy and personal finances conducted in April 2022. In 2021, 56% of Americans reported stock ownership, up from 55% in 2020.
According to Gallup, stock ownership is highly connected with:
- Household income: Only 25% of people in families making less than $40,000 held shares, compared to 89 percent of those making $100,000 or more.
- Formal education: 79% of adults having a postgraduate education own stock.
- Age: people of all ages owned stock but that number peaked at 67% for those 50- to 64-year-olds.
Before the 2008 recession, 62% of Americans reported owning stock.
Advantages Retail Investors Have Over Institutional Investors
- Able to play the long game: Retail investors are not required to pay attention to short-term market fluctuations, but institutional clients want returns every quarter or year, which leads to more frequent trading.
- Can make smaller investments: retail investors can invest in companies of any size while institutional investors may be limited because they have such large amounts to invest.
- Diversification: is sometimes a criterion that is necessary for institutional investors but not for regular investors.
- Liquidity: While institutional investors may be constrained by laws or agreements and their trades have a greater impact on market sentiment, private investors can sell stocks and bonds fast.
- Taxes: Retail investors are only required to report capital gains if they sell their investment at a profit; institutional investors, on the other hand, have much greater tax reporting obligations. Short-term capital gains are for investments held for less than a year and are taxed at the investor’s regular income tax rate; long-term capital gains are for investments held for more than a year and are taxed at a rate of 0%, 15%, or 20%, depending on the investor’s tax bracket.
Advantages Institutional Investors Have Over Retail Investors
- Access to securities: Institutional investors have access to securities that retail investors do not; as an illustration, an initial public offering (IPO) includes two stock prices: an offering price that is only available to institutions that satisfy specific requirements and an opening price that is open to all investors.
- Access to information: Retail investors might not have as easy access to research, data, and analysis as institutional investors do.
Experts often urge regular investors to diversify their holdings across several asset classes and invest in businesses with excellent fundamentals. It is not a terrible idea to ask for guidance from a financial expert if someone is uncomfortable handling their own money.