If you don’t know what a retail investor is, find the nearest mirror or turn on the front-view camera on your smartphone.

You and I are both retail investors.

By definition, a retail investor is an individual investor who lacks any professional experience in buying or selling securities (that’s stocks), funds or exchange-traded funds (ETFs).

Retail investors make their own decisions on what to buy or sell and usually do so in small amounts.

The opposite of a retail investor is an institutional investor, which is a person or part of an organization that buys securities, funds or ETFs in large amounts. This allows for lower fees and access to better tools. They are professionals and have the upper hand against retail investors.

The stock market is filled with individuals who know the price of everything, but the value of nothing.

Phillip Fisher

Key takeaway: Institutional investors are the sharks; retail investors are their dinner.

How much money do retail investors make in the stock market?

There’s not a lot of meaningful data on how much money retail investors make in the stock market, but it’s safe to say that retail investors as a collective make less than institutional investors.

Ace Equity shows how retail investors compare against institutional investors during a 15-month period on the Bombay Stock Exchange (BSE):

Source: Ace Equity

While a very small sample, the average retail investor doesn’t do too well.

A paper from the Social Science Research Network published in 2011 concluded that most retail investors:

  • under-perform against standard industry bench markets,
  • sell winning investments too soon and hold losing investments longer to a disproportionate effect,
  • have limited attention and are influenced by past performances of stocks,
  • have a herd-like mentality and repeat past mistakes, and
  • hold unbalanced portfolios.  

Remember when oil prices went negative? Commentary from the Financial Times discusses how retail investors tried to profit from low oil prices but did not understand the fund they were buying and lost big.

Article: May 7th, 2020

It’s never been easier to create an investment account and start trading as a retail investor, and if you don’t know what you’re buying…

And it’s gone

A CFA institute study found that few millennial retail investors were confident in their ability to invest:

Leave a comment below with where you rank yourself on this scale

When I made my first investment, I had very little confidence in what I was doing because I knew so little about economics and investing.

As I decided to pursue knowledge of investing through reading books and self-learning, I became more confident over time.

How do retail investors and make money with stocks?

Retail investors cannot all be lumped together into one persona. There are profitable retail investors, and there unprofitable retail investors.

Going into the stock market without a plan that you have learned and understood, you will generally lose money in the long run.

If your plan for investing is to follow free news site like CNBC, MarketWatch and what your best friends are telling you, you’ll be caught on the losing end of the trade.

The key to being a successful retail investor is to find an investment strategy that suits your lifestyle and goals – and being able to stick to it.

If you fail to plan, you are planning to fail.

Benjamin Franklin

There are many investment strategies out there for all personas that define different risk/reward ratios.

When it comes to investing, we want our money to grow with the highest rates of return, and the lowest risk possible. While there are no shortcuts to getting rich, there are smart ways to go about it.

Phil Town

Investing is managing risk.

Typically, the older you are, the less risk you want from your investments; the younger you are, the more risk you’re willing to take.

For example, a retired 65-year-old may not want to hold highly speculative assets like Bitcoin or gold and silver mining stocks in their portfolio. They don’t want to be wiped out when enjoying their retirement.

Their investment strategy is to maintain wealth and receive an income for their retirement, not to speculate with high-risk high-reward assets.

They will opt for low-risk low-reward investments such as government bonds, dividend-paying stocks and safe-haven assets like gold.

A 25-year-old who has decades of earning potential ahead of them is more likely to include high-risk high-reward assets in their investment strategy, because they can absorb the risk if wrong.

If you’re married with two children with a full-time job, you may not want to spend hours each week researching where to invest, and would rather spend that time with your kids. 

In this example, you may choose a more passive investment approach (set and forget). This is how I started my retail investment journey and it has served me well!

I found a range of funds that gave me exposure to different markets I saw value in. I set my account to buy them each month and then just forget and got on with my life.

This was a great way for me to get started on my retail investor journey. It took me a few days to figure out where I wanted to place my money, and that’s it!

To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.

Benjamin Graham

There are more active ways to invest, but to be a successful active retail investor requires you to study and become a life-time student of the investment markets.

What you don’t want to do as a retail investor is to start investing/trading without a clear investment strategy, because when things go wrong (and they will) you will start making your trades on fear than your trading plan

Do you have any questions about retail investing? Leave a comment below.