Retail Investors: Definition, Pros, and Cons

By Austin Kilham · November 22, 2023 · 7 minute read

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Retail Investors: Definition, Pros, and Cons

When it comes to buying and selling stocks, bonds, exchange-traded funds (ETFs), and other securities, there are two primary types of investors: institutional and retail investors.

Unless you work at an investment bank or big brokerage firm, you likely fall into the latter category. Institutional investors generally buy and sell securities on behalf of corporations, funds, organizations, or other high-net-worth individuals, whereas retail investors make investment decisions for themselves.

Here’s a closer look at what a retail investor, or retail trader, is and the pros and cons of investing on your own.

Key Points

•   Retail investors are non-professional individuals who invest money in their own accounts through brokerage firms.

•   Retail investors may manage their own accounts, or hire a professional to guide their investment decisions.

•   Retail investors typically make smaller transactions compared to institutional investors.

•   The SEC protects retail investors by enforcing securities laws and providing online education.

•   Retail investor activity may impact individual stocks and the market at large.

What Is a Retail Investor?

A retail investor is a non-professional, individual investor who invests money in their own accounts, typically through traditional or online brokerage firms. They may invest as an active investor, allocating the money and making trades on their own, or they may hire a professional, such as a financial planner or advisor, to oversee the investment decision-making process.

Retail trading typically involves relatively small transactions, perhaps in the hundreds or thousands of dollars. Institutional investors, such as hedge funds, might move millions of dollars with every trade.

The Securities and Exchange Commission (SEC) protects retail investors by enforcing securities laws and providing online education for investors.

How Retail Investing Works

Retail investors start by opening a brokerage account with a traditional or online broker. Online brokers may offer automated accounts, also known as robo advisors, that can help investors who prefer a hands-off approach to building a financial portfolio.

Investors transfer money into their brokerage account and then buy and sell securities, including a wide range of stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Alternatively, they can have a financial professional buy and sell securities on their behalf.

Retail investors may choose to invest in various securities depending on their investment goals and risk tolerance. For example, an investor looking for long-term growth may decide to invest in stocks, while an investor looking for steady income may choose to invest in bonds. Retail investors may also diversify their portfolios by investing in a mix of securities, such as stocks, bonds, and alternative assets.

Investors may have to pay investment commissions and fees to make trades, especially when working with a professional. Because retail investors tend to make smaller trades, these fees may be relatively high. That said, many online brokerages have reduced or eliminated commissions for individuals making trades for certain securities like stocks or ETFs. Investors can minimize the impact of commissions or fees by avoiding frequent trades and holding investments over the long term.

💡 Recommended: How to Invest in Stocks: A Beginner’s Guide

Overview of the U.S. Retail Investment Market

It is difficult to determine the exact size of the retail investment market in the U.S., as it is constantly changing and is influenced by various factors, such as economic and political events and market sentiment. Nonetheless, retail investors represent a significant portion of the American markets. By some estimates, there are more than 100 million retail investors, and American households own $38 trillion, or 59% of the U.S. equity market directly or through retirement accounts, mutual funds, and other investments.

The U.S. retail investment market has grown significantly in recent years, with many individual investors participating. This growth has been driven partly by the increasing availability of investment products and services and the increasing use of technology in the financial industry, making it easier for retail investors to access and trade securities.

What Impact Do Retail Investors Have on the Markets?

Retail investors can greatly impact individual stocks and the market at large. According to some experts, individuals are now having a greater impact on the market than they have for the last decade.

For example, retail investors took more interest in active trading during the pandemic and flocked to online brokers, trading apps, and automated investing services. During this time, investors drove up the price of so-called “meme stocks” to thwart hedge funds attempting to make money shorting the stock. Such campaigns created volatility throughout the market.

Whether this enthusiasm will continue remains to be seen. But some believe the recent popularity points to a permanent structural change in which retail investors continue to play a significant role in market movements in the future.

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Pros and Cons of Being a Retail Investor

Being a retail investor can give you access to many benefits, though there are a few drawbacks to be aware of as well. Here’s a look at some pros and cons of being a retail investor compared to an institutional investor.

Pros: Being a Retail Investor

Some of the potential pros of being a retail investor include:

•   Control: As a retail investor, you can make your own investment decisions and choose the securities you invest in. This can be a significant advantage for those who want to control their investment portfolio and actively participate in the investment process.

•   Diversification: Retail investors can diversify their portfolios by investing in various securities, such as stocks, bonds, and alternative investments. Diversification can help reduce risk by spreading investments across multiple assets rather than being heavily concentrated in just one or a few investments.

•   Accessibility: The retail investment market is generally more accessible to individual investors than the institutional investment market, which is typically only open to large organizations, businesses, and high-net-worth individuals.

Cons: Being a Retail Investor

However, being a retail investor also has some potential drawbacks, including:

•   Limited resources: Retail investors may have fewer resources and less access to information than larger institutional investors. This can make it more challenging for retail investors to compete with institutional investors in some cases.

•   Higher costs: Retail investors may also face higher costs than institutional investors, such as higher trading fees and other expenses. These higher costs can eat into investment returns and make it more difficult for retail investors to achieve their financial goals.

•   Lack of expertise: Some retail investors may have a different level of expertise or knowledge about investing than professional investors or financial advisors. This can make it more challenging for them to make informed investment decisions.

Retail vs Institutional Investors: What Are the Differences?

Retail and institutional investors are two types of investors who buy and sell securities for different purposes. Some key differences between retail and institutional investors include the following.

Retail Investors

Institutional Investors

Size Invest a relatively small amount of money Generally have significantly more capital and resources at their disposal
Investment goals May have various investment goals, such as saving for retirement, generating income, or growing their wealth over the long term May have more specific investment goals, such as maximizing returns or minimizing risk for clients or a particular group of investors
Investment strategies May focus on individual stocks and bonds, or use mutual funds and ETFs to diversify their portfolio May use more complex investment strategies, like quant trading and various derivatives
Access to information Relies on publicly available information or seeks guidance from financial advisors or other professionals Generally have access to more information and research, such as proprietary data and contacts within companies and governments
Costs Higher trading fees and other investment costs Lower trading fees and other investment costs

The Takeaway

If you’re an individual saving for the future with investments, you’re a retail investor. While there are some disadvantages to being a retail investor compared to an institutional investor, there are also many benefits, and it’s a good way to build financial security over time.

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Who is an individual retail investor?

A retail investor is an individual investor who buys and sells securities for their personal account rather than for a client, organization, or business. Retail investors may include individuals who invest in stocks, bonds, mutual funds, ETFs, and other securities through a brokerage account or other financial institution.

How do retail investors invest?

Retail investors invest in various securities and other financial instruments through a brokerage account or other financial institution. Some common ways retail investors invest include stocks, bonds, mutual funds, ETFs, and alternative investments.

How do I become a retail investor?

To become a retail investor, you’ll need to open a brokerage account with a financial institution, such as a bank or an online broker. Once you have opened a brokerage account, you’ll need to fund it. You can do this by transferring money from your bank account. Once your account is open and funded, you can start researching and choosing investments that align with your goals and risk tolerance. You can use the broker’s research tools and resources to help you make informed investment decisions.

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