Retail investor

Quick definition

A retail investor is any average person that invests with smaller purchasing power than large institutional investors.

Key details

• A retail investor is an ordinary, everyday person who buys equities and securities at a much smaller scale and with a much smaller budget than large institutional investors.
• Since retail investors make much smaller trades, they are often subjected to higher commissions and fees 
• Retail investors make up a large segment of the market and have significant impact on market sentiment

What is a retail investor?

A retail investor is a non-professional investor that buys equities and securities at smaller quantities and for lower sums than their counterparts, institutional investors. Due to their lesser purchasing power, retail investors often have to pay higher commissions and fees when making trades.

Although criticised for their lack of knowledge and expertise in making investments, retail investors make up a huge segment of the market and heavily influence market sentiment. Market sentiment is the overall tone within financial markets, and often determines trading values. Therefore, despite their smaller trades, retail investors as a collective can largely determine price floors when making investments.

The majority of retail investors have retirement and brokerage accounts, and more households have increasingly owned stocks since the financial crisis of 2008. This is largely because the modern retail investor has more access to financial literacy and trading platforms than ever before. 

Retail investors vs institutional investors

Unlike retail investors, institutional investors are the big players in the market. These investors are often referred to as smart money because they are professional investors who make much larger trades at much greater scales and with a much bigger budget. Examples of institutional investors include:

• Hedge funds
• Investment banks
• Mutual funds
• Pension funds
• Insurance companies
• Private equity firms
• Money managers
• Commercial trusts

What types of retail investor are there?

Understanding what type of investor you are is crucial to working out the type of investment that will help you reach your goals. Outside forces, including inflation, market fluctuation, and the overall economic environment can also dictate investment styles.

There are three types of investors:

• Passive/low-maintenance investor
• Active investor
• Hands-off investor/automatic investor

Passive / Low-Maintenance Investor

A passive or low-maintenance investor is one who lacks the time or desire to monitor her investments. These types of investors are unemotional about the entire investment process and tend to maintain portfolios consisting of multiple ways to spread risk.

While these investors maintain full control of their investments, they also strive to match or beat the broad market’s performance. Passive investors are fond of passive mutual funds, passive ETFs, and blue-chip stocks. While they are proactive in selecting the type of investments they want, such investors tend to be less active in balancing and maintaining their portfolios afterwards. Their investment philosophy tends to be long-term buy and hold.

Active Investor

Active investors are hands-on in all aspects of investments, from selecting investment plays to adjusting portfolios depending on performance. These types of investors spend hours each day watching over their investments.

An active investor is more commonly described as a ‘trader’, with an account in one or more online brokerages. Such investors follow the market on a daily basis, even if they don’t execute dozens of trades. The hands-on approach means they are emotionally invested to keep checking their portfolios frequently.

Active investors tend to go for select companies and are always ready to invest in a diversified portfolio. While maintaining full control of their investments, such investors are always striving to beat the market.

Hands-Off / Automatic Investor

Hands-off investors, just like passive investors, don’t have the time to watch their investments. In addition, they are not involved in the selection of investments, as they don’t believe in their ability to outperform professionals.

Automatic investors simply outsource the investment process to a team of professionals and task them with the responsibility of finding them exciting and lucrative investment opportunities. Mutual funds, ETFs, savings accounts, and managed investment accounts for a huge chunk of hands-off investors investment portfolios.

While such investors might hold dividend stocks in a bid to earn some income, most of them tend to stay clear of individual stocks that are always the subject of immense volatility. For this reason, most of them are usually focused on investment plans rather than investing in many different places.

Regardless of the type of investor you are, it is important to have a basic understanding of how capital is invested, as well as the risks and costs that come with them.