# Understanding Retail Investors: Definition, Roles, and Market Influence

> **Definition**
>
> Retail investors buy securities for their own personal accounts and often trade in dramatically smaller amounts as compared with institutional investors.

## What Is a Retail Investor?

Retail investors, often referred to as individual investors, engage in buying and selling securities, mutual funds, and ETFs using brokerage accounts. Unlike institutional investors who manage large-scale investments, retail investors trade smaller volumes for personal gain. They make their trades via traditional or online brokerage platforms, impacting market sentiment despite their smaller purchasing power.  

### Key Takeaways

*   Retail investors are individual, non-professional investors who buy and sell securities for personal accounts, often involving smaller trade amounts compared to institutional investors.  
    
*   Institutional investors, such as mutual funds and pension funds, often make up a significant portion of market trades and influence market movements due to their large-scale investments.  
    
*   The U.S. Securities and Exchange Commission (SEC) plays a crucial role in protecting retail investors, ensuring fair market practices, and providing educational resources.  
    
*   Retail investors significantly impact market sentiment, which is influenced by their trading activities and expectations for future market trends.  
    
*   The retail investment market has grown in accessibility, with lower brokerage fees and increased availability of financial information and tools for individual investors.

## The Role and Behavior of Retail Investors

Retail investors usually buy and sell trades in the [equity](https://www.investopedia.com/terms/e/equity.asp) and [bond](https://www.investopedia.com/terms/b/bond.asp) markets and tend to invest much smaller amounts than large institutional investors. Wealthier retail investors can now invest in alternatives like [private equity](https://www.investopedia.com/articles/financial-careers/09/private-equity.asp) and [hedge funds](https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp). Due to limited purchasing power, retail investors often face higher fees, though many brokers have removed online trading fees.

The [U.S. Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) is charged with protecting retail investors to ensure the markets function in a fair and orderly manner. The SEC helps retail investors by providing education and the enforcement of regulations to ensure people remain confident and comfortable investing in the markets.

Retail investors have a significant impact on [market sentiment](https://www.investopedia.com/terms/m/marketsentiment.asp), which represents the overall tone in the financial markets. Predictors of investor sentiment include mutual fund flows, the first-day performance of [IPO](https://www.investopedia.com/terms/i/ipo.asp)s, and survey data from the American Association of Individual Investors, which questions retail investors about their expectations for the market. Sentiment is also tracked by stockbrokers like TD Ameritrade and E\*TRADE.

## Challenges and Criticisms Facing Retail Investors

Critics say smaller investors do not have the knowledge, discipline, or expertise to research their investments. Investors who make small trades are sometimes disparagingly called "pikers."

As a result, they undermine the financial markets’ role in allocating resources efficiently; and through crowded trades, cause [panic selling](https://www.investopedia.com/terms/p/panicselling.asp). These unsophisticated investors are said to be vulnerable to [behavioral biases](https://www.investopedia.com/articles/05/032905.asp).

## Exploring the Retail Investment Market Landscape

The U.S. retail investment market is large, with the SEC noting that over 58% have invested in public markets.

"Forty-three million U.S. households hold a retirement or brokerage account. Fifty-six million U.S. households (44% of all households) own at least one U.S. mutual fund" as of 2018. 

And while Americans gravitated to savings accounts and passive investing in the aftermath of the 2008 [financial crisis](https://www.investopedia.com/terms/f/financial-crisis.asp), the number of households that own stocks has risen since. According to the Federal Reserve’s survey of consumer finances, 70% of upper-middle-income families owned stocks in 2019.

Retail investors often invest in companies they know from daily life and purchasing habits. This often tends to be larger, "blue chip" companies. ETFs have also become very popular with retail investors as these funds allow investors to achieve instant diversification. Each ETF contains shares in many companies, offering investors a diversified portfolio through investments in a minimal amount of funds.

Retail investors now have better access to financial information, education, and trading tools. Brokerage fees have decreased, and mobile trading has enabled investors to actively manage their portfolios from their smartphones or other mobile devices. A huge range of investment funds and online brokers have no or low [minimum investment](https://www.investopedia.com/terms/m/minimum_investment.asp) or [minimum deposit](https://www.investopedia.com/terms/m/minimum_deposit.asp) amounts ranging from zero to a few hundred dollars. Even some [robo-advisors](https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp) don’t require a minimum investment. Nevertheless, as democratized as investing becomes, it is still all about doing your homework.  

## Understanding Institutional Investors' Influence

Institutional investors are the big players in the market who move big money. Examples of institutional investors include:

*   Pension funds
*   Mutual funds
*   Money managers
*   Insurance companies
*   Investment banks
*   Commercial [trusts](https://www.investopedia.com/terms/t/trust.asp)
*   [Endowment funds](https://www.investopedia.com/terms/e/endowment.asp) for a university or college
*   Hedge funds
*   Private equity firms or investors

Institutional investors account for a significant amount of the trading volume on the [New York Stock Exchange (NYSE)](https://www.investopedia.com/terms/n/nyse.asp). They move large blocks of shares and have a tremendous influence on the stock market's movements. Because they are considered sophisticated investors who are knowledgeable and, therefore, less likely to make uneducated investments, institutional investors are subject to fewer of the protective regulations that the SEC provides to your average, everyday investor.

The money that institutional investors use is not actually money that the institutions own themselves. Institutional investors generally invest for other people. If you have a pension plan at work, a mutual fund, or any kind of insurance, you are actually benefiting from the expertise of institutional investors.

## The Bottom Line

The bottom line is that retail investors, while typically engaging in smaller trades than institutional investors, collectively represent a powerful force in the financial markets. They access securities, mutual funds, and ETFs through various brokerage platforms and contribute to market sentiment. Despite facing challenges like potentially higher fees and criticisms regarding their investment expertise, retail investors benefit from increased access to financial education and tools. Their influence on public markets shows the importance of understanding their role and impact in financial ecosystems. For retail investors, it is crucial to be well-informed and consider factors like diversification and market conditions when making investment decisions.  

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Remarks at the Meeting of the SEC Investor Advisory Committee (IAC)](https://www.sec.gov/news/speech/lizarraga-remarks-iac-030223)."
>     
> 2.  U.S. Securities and Exchange Commission. "[The Evolving Market for Retail Investment Services and Forward-Looking Regulation — Adding Clarity and Investor Protection While Ensuring Access and Choice](https://www.sec.gov/news/speech/speech-clayton-2018-05-02)."
>     
> 3.  Board of Governors of the Federal Reserve System. "[Federal Reserve Bulletin: Changes in U.S. Family Finances From 2016 to 2019: Evidence From the Survey of Consumer Finances](https://www.federalreserve.gov/publications/files/scf20.pdf)." Page 3.