What is a Retail Investor
A retail investor, also known as an individual investor, is a non-professional investor who buys and sells securities, mutual funds or exchange traded funds (ETFs) through traditional or online brokerage firms or savings accounts.
Retail investors invest much smaller amounts than large institutional investors, such as mutual funds, pensions and university endowments, and trade less frequently. But wealthier retail investors can now access alternative investment classes like private equity and hedge funds.
Critics say smaller investors do not have the expertise to research their investments. As a result, they undermine the financial markets’ role in allocating resources efficiently; and through crowded trades, cause panic selling. These unsophisticated investors are said to be vulnerable to behavioral biases and may underestimate the power of the masses that drive the market.
Retail investors do have a big impact on market sentiment. Predictors of investor sentiment include mutual fund flows, the first day performance of IPOs and survey data from the American Association of Individual Investors, which questions retail investors about their expectations for the market. Sentiment is also tracked by stockbrokers like TD Ameritrade and E*TRADE.
The retail investment market in the United States is huge. Over 50 million households are retail investors of some kind and over 50% of households have savings accounts or investment schemes like 401(k)s. And while Americans gravitated to savings accounts and passive investing in the aftermath of the financial crisis, the number of households which own stocks is rising again. According to the Federal Reserve’s survey of consumer finances, 54% of households owned stocks in 2017.
Retail investors now have access to more financial information, investment education and trading tools than ever before. Brokerage fees have fallen, and mobile trading is enabling investors to actively manage their portfolios from their smart phones or other mobile devices. A huge range of retail funds and brokers have modest minimum investment amounts or minimum deposits of a few hundred dollars, and some ETFs and robo-advisors don’t require any. That said, however, democratized investing becomes, it is still all about doing your homework.