Retail investors are non-professional investors who buy and sell securities or funds that contain a basket of securities such as mutual funds and exchange traded funds (ETFs). Retail investors execute their trades through traditional or online brokerage firms or other types of investment accounts. They invest their own money, typically on their own behalf, and often trade in smaller amounts than larger, institutional investors.
The Role of Retail Investors in the Market
Retail investors have a important impact on market sentimentality, which signifies the overall tone in the financial markets. Predictors of investor sentimentality include mutual fund flows, the first-day presentation of IPOs, and survey data from the American Connotation of Individual Investors, which questions retail savers about their expectations for the market. Sentiment is also tracked by stockbrokers like TD Ameritrade and E-TRADE.
Liquidity and diversification
Retail investors are considered to be an important source of liquidity and diversification in the market, as they tend to invest in different sectors and assets than institutional investors. Retail investors also have the potential to influence market trends and prices through their collective actions, especially with the rise of social media and online platforms that allow them to communicate and coordinate with each other.
The Challenges and Opportunities for Retail Investors
Retail investors face some challenges and disadvantages compared to institutional investors, such as:
- Higher fees or commands for their skills, although many agents have removed fees for online skills
- Limited access to important investment research, information, and analysis
- Less knowledge, discipline, or expertise to research their investments and avoid behavioral biases
- More vulnerability to market volatility, manipulation, and fraud
However, retail investors also have some opportunities and advantages over institutional investors, such as:
- More flexibility and freedom to choose their own investment strategies and goals
- More innovation and creativity to explore new investment opportunities and trends
- More access to alternative investment classes like private equity and hedge funds through platforms like Robinhood or Coinbase
- More potential to benefit from market inefficiencies and anomalies
The Future of Retail Investing
Retail investing has been growing rapidly in recent years, especially during the COVID-19 pandemic, which triggered a surge of interest and activity among retail investors. According to a report by FINRA Foundation and NORC at the University of Chicago, 15% of U.S. adults invested in stocks for the first time in 2020. The report also found that new retail investors were younger, more diverse, more educated, and had lower incomes than existing retail investors.
The rise of retail investing has been driven by several factors, such as:
- The availability of low-cost or no-fee online brokers and platforms that make investing more accessible and convenient
- The popularity of social media and online communities that provide information, education, entertainment, and social validation for retail investors
- The increased interest in environmental, social, and governance (ESG) investing that aligns with the values and preferences of retail investors
- The desire for financial independence and empowerment that motivates retail investors to take control of their own finances
The future of retail investing is likely to be shaped by several trends, such as:
- The adoption of new technologies and tools that enhance the user experience and capabilities of retail investors
- The emergence of new products and services that cater to the needs and demands of retail investors
- The regulation and oversight of retail investing activities that aim to protect retail investors from risks and abuses
- The collaboration and competition between retail investors and institutional investors that influence market dynamics and outcomes
Retail Investors is a phenomenon that has transformed the investing industry and the financial markets. Retail investors are a diverse and dynamic group of market participants who have their own challenges and opportunities. By understanding who they are and what they do, we can better appreciate their role and impact in the market.