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.
Give your money a chance to grow.
Trade stocks, ETFs, and crypto – or start an IRA.
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.
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 trading stocks online you can open a brokerage account with a traditional broker or an online option like the SoFi Invest® investment app. It allows you to invest in stocks, ETFs, and even cryptocurrency directly from the app on your phone.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.