WHO ARE RETAIL INVESTORS?
MEANING
Retail investors are individuals that invest in the stock exchange by purchasing securities of a company or units of mutual funds, such as ETFs among others that are facilitated by some mediator or broker. Such investors invest relatively smaller portions when compared to institutional investors like insurance companies, hedge funds, etc.
ROLE
- They provide capital to corporations when other sources seem difficult for financing. Since they tend to invest for a prolonged period than institutional investors, they provide a long term and stable source of investments. They play a vital role in building the stock market and hence the economy of the country. Therefore these are concerns over the protection and safeguarding the investor interest so as to protect any kind of fraud and scam and make the market safer and more transparent.
- If the investors interest is protected, the business will get a stable and long term source for building the economy. Resulting in savings of the household getting into productive means and capital forms at a fastened pace.
RETAIL VS INSTITUTIONAL INVESTORS
| Institutional Investor | Retail Investor |
| They are more frequent traders | They are less frequent traders |
| Institutional investors trade with a larger funds that has the ability to impact the stock market | They invest relatively smaller amounts |
| Institutional investors manages and invests other people’s money | They invest their own money |
| They do extensive research and analysis before investing and are less likely to make flawed decisions | They are relatively less disciplined and informative and might trade on advice and tips given by some closer one or broker. |
| They have the required knowledge and skills and can protect and avoid themselves from making emotional and behavioural errors. | They are expected to make more emotional and behavioural errors as they have fewer knowledge and skills. |
MERITS OF BEING A RETAIL INVESTOR
- As they invest for a longer tenure and have a lower turnover rate, money on brokerages and commission are saved.
- The biggest merit of being a retail investor is time as it lets its money compound over a time period. They face no pressure to generate a return for a short period.
- The retail investor invests with a smaller portion, so no dearth of good companies to invest in as compared to institutional investors who have deployed a huge sum of money and may face difficulty in finding enough good ideas or companies.
- They face no limitations or constraints while investing. Institutional investors are often limited in their investing w.r.t. The theme of the funds. Some are size specific, sector specific among others. Retail Investors have no such constraints and can add small, mid and large cap securities at will.
DOWNSIDES OF BEING A RETAIL INVESTOR
- The commissions and brokerage paid by them are more due to the lower amount of investments and low transactions as compared to institutional investors.
- The retail investors are more concentrated to make losses as they are less knowledgeable and informed and make their decisions based on hear-say many times.
- Institutional investors are way too resourceful and are first to get away from the position of some adverse report about an entity coming out or is about to come. In this way, they can save a lot of risk.
- Retail investors have fewer skills, sources, talent and tech to hunt for good investment alternatives when compared to institutional investors, which hire the best human resource from top universities and invest heavily in various softwares that assist them in the decision making process by providing details and information.
THE CRUX
A retail investor is a key to corporate funding in capital markets. It is very significant that the confidence of these investors do not get affected and remain intact. A sound and transparent market keeps them invested that ensures a consistent flow of funds to government and corporations. Once the confidence is gone or broken, it takes a lot of time to heal and regain it and also affect the ability to raise funds.
