Retail Investors Meaning
A retail Investor is an individual investor that invests in stock markets by purchasing shares of a company or invests in mutual funds, exchange-traded funds, etc. that is facilitated by some broker. Such investors invest relatively small amounts as compared to institutional investors like hedge funds, insurance companies, endowment fundsEndowment FundsEndowment fund refers to that investment fund where the donor initially contributes money to a foundation as donations. These foundations comprise hospitals, universities, churches and non-profit organizations. It has a structured mechanism where the principal sum is invested to generate income for running the foundation., etc. They invest smaller amounts in comparison to institutional investors.
They buy and sell stocks or securities directly through their demat account or invest in mutual funds or Equity Traded Funds (ETFs). Retail investors data shows that they pay higher brokerage and other fees due to the smaller ticket size of transactions. The Securities and Exchange Commission (SEC) is vested with the responsibility of protecting these individual investors from fraudulent activities.
Table of contents
- Retail investors are individual investors who buy and sell securities or other financial instruments for personal investment purposes rather than representing an institution or organization.
- Compared to institutional investors, retail investors typically invest smaller amounts and may have distinct investment goals, risk tolerances, and levels of financial knowledge.
- Retail investors commonly access financial markets through brokerage accounts, online trading platforms, or investment vehicles like mutual funds, exchange-traded funds (ETFs), or individual stocks.
- Retail investors significantly impact the overall economy and financial markets by contributing to liquidity, diversification, and capital formation.
Retail Investors Explained
Retail investors or individual investors are market participants from a non-professional background who invest by buying and selling securities in the market directly through their demat account or buy a basket of stocks in the form of mutual funds or ETFs.
Since their investment ticket size is smaller in comparison to institutional investors, they end up paying higher brokerage fees, taxes, and commissions as well. Despite their small ticket size in investment, they have a significant effect on the market sentiment.
Retail investor statistics show that they are key to the funding of corporates in capital marketsCapital MarketsA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets.. It is very important that the confidence of these investors remains intact. A sound and transparent market keeps such investors invested in the capital market that ensures a consistent flow of funds to corporate and government. Once the confidence is broken, it takes a lot of time to regain it and also affects the corporation’s ability to raise funds.
Despite the U.S. households owning over $29 trillion in the equity market, experts claim that there is a lack of knowledge, discipline, and inability to research. This results in panic selling, and behavior-driven decisions in their investing instead of reli=ying on fundamental or technical analysis.
Retail investor data shows that this group of individuals despite investing smaller amounts individually, have a large pool of money pumped into the market on a daily basis and can have a significant impact on the market. Let us understand the role of such investors in the market through the discussion below.
- The retail investor provides capital to corporations when other sources of financing seem difficult. Since they tend to invest for a longer period than institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples., they provide a long term and stable source of investment. They play a crucial role in building the stock market and, thereby, the economy of a country. Therefore there is a concern over the globe regarding safeguarding the interest of these investors to protect them from fraud & scams and make stock markets safer and more transparent.
- If the interest of investors is protected, the business will get a stable and long-term source of financing for building the economy. As a result, savings of the household gets into productive means and capital forms at a fast pace.
When an individual invests their money into a security or a mutual fund expecting good return and they usually invest in asset classes that give them an opportunity to redeem their money in case of requirement. Let us understand their expectations through retail investor statistics as discussed below.
#1 – Return of Capital
This is right at the top of the hierarchy of expectations. An investor does not want to lose his/her money in the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price. due to some scam or fraud or bad investment decisions. While the former two can be prevented by making stringent rules and bringing transparency to the whole system, an investment decision is up to the investor and may lead to losses. The fraud in the stock market may shake an investor’s confidence who may avoid investing in markets leading to instability in capital markets and thereby affecting the economy as a whole.
#2 – Return on Capital
An investor invests in stock markets with some reasonable expectations of return. As stock markets are riskier than traditional investments like fixed deposit, gold, bonds, etc., the investor expects a better risk-adjusted returnRisk-adjusted ReturnRisk-adjusted return is a strategy for measuring and analyzing investment returns in which financial, market, credit, and operational risks are evaluated and adjusted so that an individual may decide whether the investment is worthwhile given all of the risks to the capital invested. in stock markets.
#3 – Liquidity
LiquidityLiquidityLiquidity is the ease of converting assets or securities into cash. is an important aspect to consider while investing. An investor wants to be sure about the depth and breadth of a market in order to make an investment. The investor expects that in case of unexpected and immediate need of funds, the liquidity will allow him to exit a stock at fair value without any loss occurring due to lack of liquidity.
Let us discuss the advantages from the perspective of individuals and the market as a whole through the explanation below.
- The biggest advantage with a retail investor is time as it lets its money compound over a period. They face no pressure to generate a return for a short period.
- As they invest for a longer period of time and have a lower turnover rate, money on commission and brokerages are saved.
- They face no constraints or limitations while investing as faced by institutional investors. Institutional investors are limited in their investing with respect to the theme of the fund. Some are sector-specific, size-specific, etc. The retail investor has no such limitation and can add small-capSmall-capSmall cap stocks are offered by relatively small companies that are publicly listed. A small cap company has a low market capitalization ranging between $300 million to $2 billion. Small cap investors have a high-risk, high-reward approach., mid-cap stockMid-cap StockMid-Cap stocks are the stocks of the companies having medium market capitalization. Their capital lies between that of large and small cap companies and valuation of the entire share holdings of these companies range between $2 billion to $8 billion., or large-cap stockLarge-cap StockLarge-cap stocks refer to stocks of large companies with value, also known as the market capitalization of 10 billion dollars or more, and these stocks are less risky than others and are stable. They also pay a good dividend and return, and it is the safest option to invest. at will.
- The retail investor invests with a small amount, so no dearth of good companies to invest in as compared to institutional investors who have to deploy a huge amount of money and may face difficulty in finding enough good ideas or companies.
Despite the various advantages mentioned above, there are a few facets of retail investors data that proves to be a disrupting factor for the market. Let us discuss the disadvantages through the points below.
- The retail investors are more inclined to make losses as they are less informed and make their decisions based on hearsay most of the time.
- Although they trade less, the brokerage and commissions paid by them are more due to the investment of a lower amount of money and low transactions as compared to institutional investors.
- Retail investors have fewer sources, skills, talent, and technology to hunt for a good investment as compared to institutional investors, which hire the best human resource from top institutes and invest heavily in various software that assist them in their decision-making by providing information.
- Institutional investors are resourceful and are first to exit their position if some adverse report about a company is about to come. This way, they can save a lot of losses most of the time.
On the other hand, they get trapped in such a company as they are not a full-time investor that gets to closely monitor each stock holding and analyze them, nor are they as resourceful as institutional investors.
Retail Investor Vs Institutional Investor
The comparison between retail investor statistics and institutional investor has been on for decades. Let us understand the differences in their fundamentals, operating styles, and intentions behind investments through the comparison below.
|They trade less frequently.
|They trade more frequently.
|They invest a relatively smaller amount.
|Institutional investors, on the other hand, trade with a much larger amount of money that has the ability to influence stock market movements.
|These investors are relatively less informative, less disciplined, and they mostly trade on tips or advice given by the broker or some close one.
|Institutional investors do extensive research before investing and are less likely to make bad investment decisions than retail investors.
|These investors invest their own money.
|Institutional investors, on the other hand, manages and invests other people’s money.
|These investors trade in smaller amounts and less frequently, the brokerage and commissions paid by them are more than an institutional investor.
|Institutional investors invest in large amounts and trade more frequently; therefore, they can bargain for a better price from brokers.
|They are expected to make more behavioral and emotional errors as they have fewer skills and knowledge.
|As they have the required information and skills, they can prevent and avoid themselves from making behavioral and emotional errors.
Frequently Asked Questions (FAQs)
Yes, there can be tax implications for retail investors. For example, depending on the jurisdiction and the type of investment, retail investors may be subject to taxes on capital gains, dividends, or interest income. Therefore, investors need to understand their tax obligations and consider consulting with a tax professional for guidance.
Potential risks for retail investors include market volatility, potential loss of capital, lack of diversification, liquidity risk, and the possibility of investment fraud. Understanding these risks and conducting thorough research before investing can help retail investors make informed decisions and manage their risk exposure effectively.
Retail investors should avoid common mistakes, including chasing hot investment trends without proper research, failing to diversify their portfolio, succumbing to emotional decision-making, timing the market, not having a clear investment plan or goals, and not regularly reviewing and adjusting their portfolio. Instead, retail investors must educate themselves and seek professional advice to avoid these pitfalls and maximize their chances of success.
This has been a guide to Retail Investors and their meaning. Here we explain their role, and advantages, and compare them with institutional investors. You may learn more about financing from the following articles –