Retail investor
A retail investor is a non-professional who trades smaller volumes of stocks, bonds, cryptocurrencies, exchange-traded funds (ETFs), or mutual funds for their own personal account, using their own money.
Because of limited funds, retail investors commonly invest smaller amounts of money, in comparison to institutional investors. Moreover, due to the fact that for the overwhelming majority of retail investors, trading is not their primary occupation, they frequently exhibit more emotional trading behavior, basing a large fraction of their decisions on emotional biases, thus contributing to noise fluctuations in the financial markets.
Retail vs. institutional investors
In contrast to retail investors who buy stocks in publicly traded companies on the stock exchange, institutional investors purchase stock in hedge funds, pension funds, mutual funds, and insurance companies. As the name suggests, institutional investors are companies or organizations that manage pooled funds.
- Smaller sums of money – because of the fact that retail investors operate with their own funds, rather than accumulation of clients’ funds, they operate with significantly smaller sums of money.
- Less diversified portfolios – retail investors invest predominantly in the equity and bond markets, whereas institutional investors have access to more sophisticated trading products.
- Higher fees – following the laws of big numbers – if the same transaction fees apply for trading 3 instruments, or 300 instruments, institutional investors are exposed to smaller fees because they trade larger volumes of instruments on a daily basis.
Unregulated decision making – institutional investors oversee the funds of others, for this reason their actions are closely monitored not only by their supervisors, but also people owning the funds, therefore they are not completely free in their choice of investment making. On the other hand, retail investors have the freedom to choose and select instruments according to their own liking.
