Updated July 17, 2023
Introduction to Retail Investors
A retail investor is an individual investor who buys and sells securities, mutual funds, or exchange-traded funds for his personal account. They trade in small quantities as part of their investment plan.
Retail investors are not professional investors; predominantly, they do it as part of their investment plan. They trade in securities through online trading accounts. They don’t trade as frequently as institutional investors like mutual funds, pension funds, or endowments, and their investments are small compared to institutional investors.
They are not as knowledgeable and skilled as professional investors. Still, the retail investment space is growing, with more individuals investing through pension accounts, mutual funds, brokerage firms, online trading accounts, etc.
Role of Retail Investors
Retail investors and institutional investors play an important role in the capital market. They have put their savings in the capital market and built the country’s economy. Investors are the pillar of any securities market and the key players in the financial system. Retail Investors largely invest for long-term growth and benefits, whereas institutional investors work on the short-term gains that can be generated. If the interest of the retail investors is protected, the corporate and government will be guaranteed long-term finances for building up the economy.
Examples of Retail Investors
Mr. A, a retail investor, plans to invest in X Corp. After his independent research and analysis, he plans to buy 50 shares of X Corp. He bought X Corp @ $1,950/share on 1st Jan’2017. At the end of two years, X Corp’s share price is as below.
So, Mr. A invested $97,500 (50 shares @ $1,950/share) on 1st Jan’17. The same is trading at $130,000 (50 shares @ $2,600/share) on 1st Jan’2019. The share value was appreciated by 33.33% over a period of 2 years. If Mr. A continues to retain the X Corp shares for a longer period, the value of the shares may increase even more, appreciate, and give him better returns.
In this case, Mr. A holds shares in one company. His portfolio is not diversified as he is a small investor. If any unfavorable event happens to X Corp, it becomes a risky investment, and he may lose his capital completely. So, the key point in capital market investment is keeping up-to-date information about investing companies, risk management strategies, and proper exit periods before incurring a loss. To avoid the risk, people prefer trading through mutual funds and broking firms as they are supported by proper financial information.
Retail Investors Statistics
The retail investment market is constantly growing; investors now have more access to financial information, investment options, and trading tools. The percentage across the world is growing year on year, with the availability of information on the internet reducing the dependability of investors on broking firms, and through opening an online trading account, any individual investor can directly trade with the shares of the listed companies.
Retail Investor Market Size
Retail investors continue to invest in the capital market considering the long-term growth in stock value, and the returns from stocks are higher than the traditional investments of bonds, deposits, etc. As per the latest statistics, retail investors account close to 20% of the stock market activity in the US. This is expected to grow in the future years as retail investors show more interest in capital market investments. This helps them to reap better returns in the long term.
- Retail investors predominantly invest for long-term benefits and capital appreciation. Since they avoid the short term, they can save a lot on trading fees.
- They make small investments, so investing is easy, and they enjoy more freedom than institutional investors.
- Liquidity is more for retail investors as they can sell and exit anytime when the prices are better. In contrast, institutional investors must follow regulations and need to manage the investors’ pressure.
- They can enjoy cash immediately by selling the investments as they trade in small quantities, which does not impact the share prices. In contrast, institutional investors trade in large quantities, making buying and selling stocks instantly harder. It will also affect the market sentiments.
- Institutional investors are expected to have a diversified portfolio. In contrast, retail investors can focus on best-performing stocks and have the freedom to have their own investment strategy as they manage the risk themselves.
- Retail investors invest for their personal benefits, so they show more interest and focus than institutional investors, who may not be able to cater to the needs of all the investors.
- The cost of investment is high (i.e.) broking firms charge high management fees, which causes a disadvantage to the retail investors as they need a higher return to break even the cost of investment.
- Diversification is a key risk-management strategy. Retail investors cannot go for diversification as their investments are low, and they cannot invest across different industries and sectors, making their portfolio risky as a single event can make their investment go for a toss.
- Lack of skillsets and financial information is a big drawback for retail investors. Institutional investors have research analysts who work on financial data and decide on investment plans, whereas retail investors may not have the required data and information before investing in shares. Staying updated is a key factor in capital market investment, as single news can affect market sentiments. So, much time and effort are required to stay successful in the capital market.
Retail investors have a good scope in the capital market with a growing economy and business worldwide. It is a good investment and yields better returns than traditional fixed-income investments. Though it is a risky investment, routing through the right channel like mutual funds, broking firms, etc., can direct the investors on the right path. Retail investor must have their own strategy and risk mitigation plans before investing in the capital market.
Growing technology and easy access to all information through the internet make investors aware of the updated information through which they can make a proper decision to invest their money. Investment in the capital market boosts the economy of the country. Investors are the backbone of growing business sectors. Right planning and strategy in the capital market can help the investor generate high returns.
This is a guide to Retail Investors. Here we discuss the introduction and Role of Retail Investors along with its advantages and disadvantages. You may also have a look at the following articles to learn more –