Retail Investors Meaning
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 investor 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.read more, etc.
Role of Retail Investors
- The retail investor provides capital to corporate 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.read more, 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.
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Expectation
The retail investor has three basic expectations from the market regarding investment-
#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.read more 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.read more in stock markets.
#3 – Liquidity
LiquidityLiquidityLiquidity shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses.read more 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.
Difference Between Retail Investor and Institutional Investor
| Retail Investor | Institutional Investor |
|---|---|
| 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. |
Advantages
- 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 has 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-cap, 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.read more, or large-cap stock 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.
Disadvantages
- 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 are
Conclusion
A retail investor is a 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.read more. It is very important that the confidence of these investors remains intact. A sound and the transparent market keep 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 corporate’s ability to raise funds.
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