There are two main categories of investors when it comes to buying and selling stocks, fixed income investments, and other securities: retail and institutional investors. In this article, we'll define what a retail investor is, how retail investors differ from institutional investors, and other important things to know about categorizing investors.
What is a retail investor?
Broadly speaking, the term "retail investor" refers to investors who make investment decisions for their own accounts or who have investment decisions made for them. Specifically, retail investors (also commonly called retail traders) include a few different types of investors:
- Individual investors who invest through a retail brokerage or other types of investment accounts they control themselves. For example, I have an investment account with retail broker TD Ameritrade and purchase individual stocks and other investment vehicles for my own portfolio, so I'm a retail investor. Similarly, an individual who participates in a crowdfunded private equity investment through their own account would be considered a retail investor.
- Individual investors who have account managers who make investment decisions for them. For example, if you hire a financial planner to oversee your investment portfolio and to make buy-and-sell decisions within your account, you're still a retail investor even though you aren't making investment decisions yourself.
- Groups of individuals who pool their money to make stock investments and share investment decision power. The big distinction is that the investment decisions being made are designed to benefit individuals, not corporations or other entities.
For the most part, retail investors invest relatively small amounts of money. While a hedge fund might invest hundreds of millions of dollars at a time in the stock market, retail investors are more likely to measure investments in the hundreds or thousands of dollars. The term retail investor is often used interchangeably with the phrase "small investor," although a retail investor doesn't have to have a small account value to be included in the category.
To sum it up, retail investing involves making investment decisions for individual investors, not corporations, organizations, funds, or other entities.
Retail investors are one of two main groups of investors, with institutional investors being the other one. And the simple definition of an institutional investor is any person or entity that makes investment decisions on behalf of a non-individual.
For example, a mutual fund or exchange-traded fund, or ETF, (as well as its investment managers) would be considered an institutional investor. A Wall Street investment bank that buys and sells securities would be another example of an institutional investor. A pension fund would be another example of an institutional investor, as it invests on behalf of a large organization as opposed to each of its participants as an individual.
Generally speaking, institutional investors trade large amounts of money at a time and therefore tend to have greater influence over the financial markets than retail investors. This isn't a set-in-stone rule, as someone with a $100 million brokerage account could still be considered a retail investor, but in most cases this is a big difference between the two.
Retail investor versus accredited investor
Another important distinction to make is the difference between the terms "retail investor" and "accredited investor." And the short version is that the terms are referring to different types of characteristics.
You can read a discussion of what an accredited investor is here, but in a nutshell, an accredited investor is an individual or other entity that meets certain net worth or income requirements or has a certain credential that demonstrates financial sophistication.
To be perfectly clear, an accredited investor can be either a retail investor or an institutional investor. For example, an individual with more than $1 million in net worth excluding their primary residence would be both a retail investor and an accredited investor. On the other hand, a corporation with more than $5 million in assets would be an institutional investor but would also be classified as an accredited investor.
The Millionacres bottom line on retail investors
A retail investor refers to an individual investor, whether they make their own investment decisions or not. Retail investors tend to invest relatively small amounts of money at a time, while institutional investors make investment decisions for corporations, other organizations, or for large groups of people at the same time.