A variety of research and trading tools give amateur investors more options than ever
Ever since the introduction of the individual retirement account (IRA), investing has become available to non-professional investors. As the Covid-19 pandemic proved, these investors, known as retail investors, have become a significant part of the investing community. In fact, Charles Schwab reported that 15% of retail investors made their first trade during the pandemic.
And the reality is that for this group of investors, the best days may be yet to come. That’s because today this group has access to a range of research and trading tools than ever before. And while retail investors will never have the buying power, and therefore the opportunity to move the market, like institutional investors, they have the opportunity to build wealth slowly.
In this article, we’ll define the retail investor and the pros and cons of being a retail investor. We’ll also go into more detail about why it’s never been a better time to be a retail investor.
What is a Retail Investor?
A retail investor (i.e. individual investor) is a non-professional investor who buys and sells individual securities. The retail investor may also invest in index funds, mutual funds, and/or exchange-traded funds (ETFs) to get exposure to a variety of securities in one fund. A retail investor executes their trades through either a traditional or online brokerage firm.
In contrast to the retail investor, institutional investors are professional investors who manage pension funds, mutual funds, investment banks, commercial trusts, hedge funds, and many private equity investors. Unlike retail investors, these investors have massive amounts of money they can use to invest. In fact, institutional investors account for over 85% of the volume of trades on the New York Stock Exchange (NYSE).
However, that’s not to say that retail investors have no impact. At its peak in 2021, retail investors were providing approximately 10% of the trading volume for the 3,000 largest U.S. stocks.
I Own a 401(k) Am I a Retail Investor?
Yes, but you’re doing it in a different way. Many companies offer tax-advantaged retirement accounts as a benefit for their employees. But if an employee chooses to invest in that plan, they are a retail investor. While they don’t pick the specific stocks that make up the fund(s) they invest in, they do have choices regarding the way the fund invests. And they can also change their fund selection, typically on a quarterly basis, if their investment objectives and/or risk tolerance has changed.
What Are the Benefits of Being a Retail Investor?
Conventional wisdom says that investing is a rigged game that will never let retail investors benefit. And because of the amount of money they trade, institutional investors can move markets in ways that retail investors simply can’t.
However, there are benefits that retail investors have that institutional investors do not. For example, institutional investors are frequently required to “spread the wealth” among dozens or hundreds of stocks. That means they can’t build a concentration in any one stock. A retail investor can choose the precise number of stocks they wish to buy. And while diversification is important, investors know that the larger position an investor has in one stock increases their potential returns.
A second benefit is that retail investors are frequently the champion of small-cap stocks (i.e. stocks with a market capitalization of less than $2 billion). Institutional investors either are not permitted to trade these stocks or are restricted in the percentage they can hold.
And the third benefit for retail investors is flexibility. Retail investors can move in and out of different investments and asset classes at will. That’s not the same for institutional investors, particularly fund managers, who are limited by the fund’s objectives.
Knowledge at Your Fingertips
Investing is not a set it and forget it activity. There is a certain amount of research that’s required. However, this information is easily accessible and not difficult to understand when you know what to look for.
MarketBeat provides snapshots of individual companies that give investors virtually all the information they need to make an investment decision. And with a premium subscription, investors can get access to a wide range of stock screeners and other tools that allow investors to compare stocks. And all of this information is literally at your fingertips on your mobile device.
And there are a variety of online communities that are devoted to trading and investing. One of the most well-known of these is the Reddit community and the subreddit Wallstreetbets. But while these communities became a household name due to their association with the “meme stocks,” this is a good resource for retail investors who are looking for strength in numbers.
Technology Has Changed the Game
It wasn’t that long ago that retail investors were largely limited to being in an employer-sponsored plan. But today, any retail investor can begin trading in 30 minutes or less through a mobile app. And in many cases, these investors can trade options, cryptocurrencies, and even use margin.
And they can do that knowing that retail investors are protected by the U.S. Securities and Exchange Commission (SEC). On the one hand, the SEC does restrict how much investors can day trade, use margin, or invest in certain asset classes. On the other hand, the agency also requires public companies to provide regular filings that are made public for every investor.
Risks For the Retail Investor
One of the downsides of being a retail investor is that they pay fees for everything. There’s a fee to buy a stock and one when it gets sold. Investors who buy on margin pay more as do those who buy on options. And even the “commission-free” apps do charge a fee. And this fee is usually larger than retail investors would pay if they went through a traditional broker.
Second, retail investors are not professional investors. They have jobs and families that require their time. For institutional investors investing and analyzing stocks is their sole focus.
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