This is even true if you use an app that has no commissions. You pay annual fees and expenses for any fund you buy. You pay a higher fee if you do it on margin or if you buy options. You pay a fee when you buy a stock and when you sell it. But if you're a retail investor who works in accounting for a dog food manufacturer, it's more difficult to really be able to understand a biotech stock. They may not have the local knowledge you have in your industry, and there may be a lag before they know things, but they have at least a basic knowledge of every industry. Institutions can hire people to become specialists in every industry. The problem is that degrees of competence can pigeonhole you. If you work for a bank, you probably have a good handle on current interest rates and credit standards. If you work for a construction company, you may understand the supply and demand dynamics for lumber, copper, and other materials. As a retail investor, it's likely that you have some level of competence in a specific industry. If those types of stocks are in a bear market, the fund just has to try to work around it. Many funds are created to buy growth stocks only or large-cap stocks only. Institutions have strict regulations from the SEC and from their own prospectus guidelines. If you want to buy gold bars and load them into a safe right before forgetting the combination, you can. Please read our Privacy Policy and Terms of Use.Īs a retail investor, if you want to hold cash for a while, you can. The Motley Fool respects your privacy and strive to be transparent about our data collection practices. Other products and services that we think might interest you. It's unlikely a single retail investor would ever move the market, but institutions with holdings in the billions of dollars have to be careful when they buy and sell stocks to avoid moving the stock too far in the wrong direction.īy submitting your email address, you consent to us keeping you informed about updates to our website and about Many institutions can't purchase these stocks because they have too many assets under management and are restricted in the percentage of a company they can hold. Small-cap stocks (meaning stocks with a market capitalization of less than $2 billion) generally outperform the market. The more concentrated you are (to a point since you need some diversification), the higher your potential returns. Retail investors can choose the number of stocks they want to buy. Institutional investors are often required to hold hundreds of stocks. Here are a few of the pros and cons of being a retail investor: Table by author. The SEC also regulates the filing process for public companies offering stock to investors. The SEC sets strict requirements for which investors can day trade, use margin, or invest in asset classes such as hedge funds or private equity.
Securities and Exchange Commission (SEC).
The whole process is governed by the U.S. Retail investors can even use margin, or loans, to buy stocks and other assets. Investors can now buy and sell stocks, options, and funds with the click of a button. A process that was limited to the 1% 40 years ago and to people with the time and energy to fill out endless forms 10 years ago can now be completed in 30 minutes on an app. Recent innovations in brokerage technology and business model have made investing far easier for retail investors. Most retail investors use discount brokerages or apps such as Robinhood ( NASDAQ:HOOD) or invest through an employer-sponsored 401(k) or other retirement plan. Retail investors typically invest in stocks and bonds but mostly in stocks since bonds are notoriously difficult to trade on most trading platforms. Let's go over how the retail investing market works, its size, and the pros and cons of being a retail investor as opposed to an institutional investor. That's a very wide range of skill levels and specialties. Anyone who doesn't do investing as a career is considered a retail investor.
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