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Retail Investors: Definition, Pros, and Cons

By Austin Kilham · July 30, 2021 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

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 investors and retail investors.

Unless you work at an investment bank or big brokerage firm, you likely fall into the latter category. In general, institutional investors buy and sell securities on behalf of corporations, funds, organizations, or other 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.

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 on the other hand, such as hedge funds, might move many millions of dollars with every trade.

While individual investors’ trades may not amount to huge numbers, there are more than 100 million retail investors. Taken as a whole, retail investors represent a significant portion of the American markets. American households own $29 trillion, or 58% of the US equity market directly or through retirement accounts, mutual funds and other investments.

How Retail Investing Works

Retail investors get started by opening a brokerage account either with a traditional or online broker. Online brokers may offer automated accounts, or robo advisor accounts, that can help investors who prefer a hands-off approach to build a 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), mutual funds, and index funds. Alternatively, they can have a financial professional do the buying and selling on their behalf.

Investors may have to pay investment 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 eliminated fees for individuals making trades for certain securities like stocks or ETFs. Investors can minimize the impact of fees by avoiding frequent trades and holding investments over the long term.

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

Recommended: Investing 101: A Guide to Investing for Beginners

What Impact Do Retail Investors Have on the Markets?

Retail investors can have a big impact on individual stocks and the market at large.

While they played a relatively small role in the historic rally and bull market leading up to the recession in spring of 2020. Yet, during the pandemic retail investors took more interest in trading themselves and flocked to online brokers, trading apps, and automated investing services.

Individuals are now having a greater impact on the market than they have for the last decade, according to some experts. In recent months, for example, in which retail investors have driven up the price of so-called “meme stocks” in an effort to thwart hedge funds attempting to make money shorting the stock. Such campaigns have 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 big role in market movements in the future.

Pros and Cons of Being a Retail Investor

Being a retail investor can give you access to a lot of 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

•  Small investments: As a retail investor you can have a small stake in the stock market. You can buy as little as one share of stock in a company, or some brokers may even allow you to buy fractional shares, which allow you to invest in companies whose share price might otherwise be too expensive for you. Some platforms also allow retail investors to make trades in alternative investments, such as cryptocurrency, or in IPOs.

  Other types of investors can have equity requirements for trades. For example, the SEC requires day traders using margin accounts to have a minimum of $25,000 in the account each day trading takes place.

•  Liquidity: Stock and bonds are relatively liquid, meaning you can quickly exchange them for cash by selling. Institutional investors may have a tougher time liquidating their positions, especially if they are bound by a set of rules or agreements that holds them to a certain course of action.

•  Little paperwork: The only time you’ll have to deal with investment-related paperwork as a retail investor is at tax time if you owe capital gains taxes or taxes on dividends. You only owe capital gains if you sell an investment at a profit. If you held the investment for less than a year you’ll owe short-term capital gains equal to your income tax rate. All other investments are subject to long-term capital gains taxes, for which you’ll owe 0%, 15%, or 20%, depending on your tax bracket.

Recommended: Paying Taxes on Stocks: What You Need to Know

Cons: Being a Retail Investor

•  Fees: Brokers may charge you a fee when you make a trade. This fee can vary depending on what type of security you’re buying. That said, many brokerage firms and online brokers no longer charge fees for trading stock and some other investments. While professional traders can write off fees as a tax deduction, retail investors are stuck with them.

•  Lack of professional guidance: Professional traders may have a deep well of experience and access to information that helps them choose investments that meet their needs. A retail investor flying solo, doesn’t necessarily have that back up. If you want a little extra guidance, consider working with a financial professional who can help you build a well diversified long-term portfolio.

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.

If you’re ready to get started investing you can open a brokerage account with a traditional broker or an online option like the SoFi Invest® brokerage platform. It allows you to invest in stocks, ETFs, and even cryptocurrency directly from the app on your phone.


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