Retail investing is the act of non-professional investors buying and selling securities for their own purposes. Retail investing has become popular with the rise of zero commissions digital platforms enabling anyone with small portfolio to trade.
Understanding retail investing
When compared to institutional investors, retail investors tend to trade less frequently and in much smaller quantities. With high brokerage fees and no requirement to generate a return over a short period, retail investors tend to invest for the long-term in companies of their choosing.
As a result, they exert less influence over corporate decisions and the share market. Retail investors seldom have access to corporate boardroom discussions and generally have little opportunity to liaise with company executives.
Nevertheless, retail investors provide capital to growing businesses when other sources of financing are unavailable. Given that they tend to invest for a longer period, they are a preferred source of stable capital.
Retail investors are also important drivers of market sentiment, defined as the overall attitude of investors toward a particular security or market.
Different types of retail investing
Within retail investing exist several different types of investors:
- Those who invest through a retail brokerage service with full control over their investments. This includes those who participate in crowdfunded private equity investment.
- Those who have account managers to oversee their portfolio and make decisions on their behalf.
- Groups of retail investors who pool money and knowledge to make decisions that benefit every group member. These are otherwise known as investment clubs.
Advantages of retail investing
Although retail investors do not have the financial influence of institutions, they enjoy several advantages:
- Long-term focus. As noted in the introduction, retail investors differ from institutional investors in that they are under no pressure to generate returns in a short period. The patient “buy-and-hold” strategy of retail investing is less sensitive to short-term market corrections.
- Freedom of choice. While many institutional investors are limited in the types of companies they can consider, retail investors have the freedom to invest at their leisure. Many choose to take advantage of the small firm effect, which describes the ability of a company with a small market capitalization to outperform a larger company.
- Personal interest and attention. Given that retail investors are investing their own hard-earned capital, there is a higher likelihood that their investments are backed by robust due diligence. Combined with a tendency for patience, retail investors have the conviction to hold and realize profits when it suits them.
- Retail investing describes investors who make investment decisions for their own accounts.
- Retail investing is associated with smaller, less frequent trades and a lack of access to corporate discussions or company executives. However, it is a stable source of capital for emerging businesses and has significant impacts on market sentiment.
- Retail investing has several advantages over institutional investing. Retail investors are unconstrained by the need to generate a return in a predetermined timeframe. This gives them the ability to maintain a long-term focus backed by robust due diligence, conviction, and personal interest.
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