The stock market is home to different kinds of investors and traders. Each one comes with different skills and objectives for trading in the stock market. Apart from huge players like mutual funds, hedge funds, high-networth individuals, etc., there are regular small-scale investors, like most of us.
Today, we will discuss the investors most of us know closely – the retail investors. Read further to know more about the role of retail investors in stock markets.
Who are retail investors?
Retail investors are solo investors in the financial markets. They invest in equities, bonds, and derivative instruments through a broker.
They are usually small-scale investors who do not have the authority to trade directly on exchange platforms. Hence, they rely on online or offline brokerage services that provide trading facilities in exchange for fees and commissions.
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Investment options for retail investors
All financial instruments are available for retail investors, like all other investors. Some popular investment options are as follows:
- Stocks: Stocks represent shares of public companies. Retail investors can either buy and sell shares in the secondary market or buy them directly when companies launch their IPOs (Initial Public Offerings). According to the Securities and Exchange Board of India (SEBI), retail investors have a reserved portion for subscription during IPOs.
- Debt instruments: Retail investors looking at stable and low-risk investments can invest in debentures and bonds. Government bonds are considered a good option for risk-averse retail investors.
- Exchange-traded funds: Retail investors can trade in ETFs that involve stocks and bonds of stock market indexes.
- Derivatives: Derivatives are traded on stock exchanges, too. These are instruments whose values vary based on an underlying asset. Retail investors can trade in derivatives through brokers.
- Currencies: The foreign exchange market has trillions of trade volumes every day. It is open for retail investors to exchange one currency for another.
- Mutual funds: These are funds owned by asset management companies. They collect funds from different investors and invest them across different products and sectors. Mutual funds are considered ideal for novice retail investors as the funds are handled by a specialised manager.
Importance of retail investors
Retail investors enter the financial market for additional income. In general, retail investors commit themselves for a longer time as compared to other kinds of investors who primarily trade for profits. The long-term approach of retail investors gives corporations cushioning and stability.
An individual investor may not have a driving force on the market. But, considering the entirety of retail investors shows how significantly they impact the stock market.
Consider the example of Rakesh Jhunjhunwala, a retail investor who became one of the most popular investors in the country. Though his name was associated with insider trading, his strategies and trading tips are considered famous to date.
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Trading limitations for retail investors
While investing in the stock market is a good source of additional income for retail investors, it comes with some limitations.
- Retail investors are individuals who rely on brokers to execute their transactions. Since they do not have access to trade directly on the exchange, they have to pay high costs in the form of brokerage and other fees to brokers. This significantly reduces the investor’s profit.
- Retail investors mostly rely on the information that is accessible in public forums. Sometimes, these may not be sufficient to make profitable trading information. The lack of information may restrict retail investors from earning well through this avenue.
- Investors, especially new ones, may not have the skills to use the technical tools relevant to decision-making. Lack of advice and skill can lead to incorrect decisions, thereby causing losses.
- Investors who invest directly in stocks and not through mutual funds must keep a close look at the market, given the volatility of stock prices. Timely actions are crucial, which may not be possible for investors among other commitments.
Retail investors vs. Institutional investors
|Large-scale organisations, working on behalf of other investors.
Example: Banks, mutual and hedge funds
|Small-scale individual investors, trading in the stock market for themselves.
|Heavy trading volumes
|Small volumes of trade
|Brokerage costs are reasonable, given the large volume
|Brokerage costs are expensive
|Access to special market information for making trading decisions
|No access to special information apart from the data available to the general public.
|Market makers – They influence the market movement with large volumes of trade
|Market takers – An individual investor does not have the power to influence market movements.
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Retail investors in India
The exposure of individuals to financial markets is on the rise. With more people exploring different avenues of earning money, the number of investors trying their luck in financial markets is increasing.
According to recent data, the number of retail investors in the National Stock Exchange holding equity has risen from 1.85% in 2020 to 8.75% as of 2023.
The role of retail investors is significant in the mutual fund market. Since mutual funds involve fund managers handling individual investor’s investments, most retail investors consider this the safest path to enter the stock market.
Retail investors are individuals who trade in equities, bonds, derivatives and other instruments in financial markets. Though there are limitations concerning their knowledge and skills, there is a rise in the number of investors entering the financial market, given the opportunities for earning profits. However, it is suggested that retail investors begin with safer options like mutual funds until they gain the required expertise and exposure.