What is a Retail Investor?

August 31, 2021

In the markets, there are a number of different kinds of investors. There are institutional investors, large, corporate interests that are staffed by full-time investment managers and bring millions (or billions) of dollars to the table. There are also professional investment funds, such as hedge funds and private equity funds, that manage money for others and do so on a full-time basis. And then there are so-called “retail” investors.

But what does that term mean?

It’s pretty simple. Retail investors are you and me. A retail investor is a non-professional investor who buys and sells securities through brokerage firms or savings accounts like a 401(k). They are regular people who are involved in the market on some level.

And there are a lot of us. In fact, over half of Americans, either personally or jointly with a spouse, report that they own at least one share of stock directly or through investment vehicles, like a self-directed 401(k) or IRA, according to the Securities and Exchange Commission (SEC).

Those are the retail investors of the world.

The Retail vs. Institutional Investor

As a rule, retail investors are different from institutional investors, which are people or entities that trade securities in large enough quantities that they qualify for preferential treatment and lower fees.

Institutional investors are big—think mutual funds, pensions, or university endowments. In addition to more buying power, they have the primary goal of delivering returns to their investors.

Retail investors, however, are usually driven by personal goals, including planning for retirement, saving for their children’s education, or financing a large purchase such as a home.

Retail investors also typically trade in much smaller amounts than institutional investors. Because of that, retail investors typically have to pay higher fees on trades, in addition to marketing, commission, and other related fees. But, the retail investor is not alone; the SEC considers retail investors “unsophisticated” investors by definition, and as such they are afforded certain protections and barred from making certain risky, complex investments.

For instance, most retail investors are not legally allowed to invest in risky vehicles such as hedge funds. You need to be accredited for that, and bring a sizeable minimum investment (often in the millions) to the table.

How Retail Investing Works

Retail investing can happen in a few different ways: directly by the investor (such as via your broker’s website), through a retail broker (who acts at the direction of these individuals), through a managed account (whereby the account manager makes the buy and sell decisions for the individual), and through an investment clubs (groups of people who pool their money to invest).

Among these, there is no one accepted way to invest that is considered the “best,” but in order to win as a retail investor it’s important to build up an investment strategy that reflects not only your financial goals but your place in the hierarchy of the investing world.

Because, as a retail investor, you are the little guy on the team. Instead of using a similar strategy to large institutional investors, like mutual funds, it’s important to play to your strengths and advantages.

How to Succeed as a Retail Investor

Take your time: Retail investors don’t have to be in a rush to buy and sell, like larger investors that often feel a push as the steward of the investments of many. With that in mind, retail investors should take the time to make sure any move is the right one before they cut any losses or decide to sell high.

Do your research: Retail investors do not have the advantage of the institutional knowledge that that larger investors do, nor do they have multiple sets of eyes on their investments at any given moment. So, retail investors should research their investments as thoroughly as possible before investing using multiple resources, which may or may not mean engaging a financial advisor. Retail investors should also consistently keep a close eye on their portfolio.

3. Look for quality in your investments: With less buying power than the big guys, retail investors should also focus on quality over quantity. Regardless of their specific strategy, they should consistently seek stocks that have the potential to grow

4. Concentrate in winning sectors: Again, with less buying power, retail investors should weigh concentration with diversification. Diversifying a portfolio offers certain benefits, like protecting against volatility. But, it can also limit gains. Concentrating resources on well-chosen and carefully monitored stocks can help the retail investor win big.

5. Don’t ignore your own personal interests. Whether a retail investor has a hobby interest in new technology advances, feels committed to sustainability initiatives, or follows the big stock market players closely, putting at least some investments in the sphere where their interests are is a good rule. If nothing else, you’ll likely know more about these markets anyway and have a built-in excuse to research them deeply and keep up with new developments that might impact your investments.

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.