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Individual investors, or retail investors, have more access to financial information, investment education and trading tools than ever before. And as such, retail investors are making bigger waves in financial markets as an entity—and gaining attention for it—more than they have in many years. Perhaps not since the founding of the U.S. Securities and Exchange Commission (SEC), to bring investors back during the Great Depression, has there been more concern regarding retail investors’ market participation.

Retail Versus Institutional Investors

Retail investors are one of two types of investors as market participants. The other type is institutional investors. Fundamentally, retail investors are those who make personal investment decisions or employ someone to make personal investment decisions for them. Individually, retail investors have greater relative freedoms.

What distinguishes retail investors is not being institutional investors, who are professional market participants. Institutional investors make financial decisions on behalf of an organization—any non-individual entity—typically controlling a large amount of capital. Well-known examples are mutual funds and exchange-traded funds (ETFs), banks and pension funds. Professional investment managers make decisions that benefit their institution, not each of the institution’s individual participants. They are often beholden to investment objectives that place limits on how they invest.

That small nuance is where the field opens up for the difference in investment strategies between retail and institutional investors. Individual investors execute their trades through traditional or online brokerage firms or other types of investment accounts and tend to trade in small amounts that are dramatically different than the scale at which institutional investors operate.

Tracking Retail Investor Activity

Retail investors are often considered small investors because individually they have less money to put to work. Institutional investors have more influence over the financial markets in general because they trade in large amounts. With their strategies and fund objectives, investment professionals are perceived as making more rational trading decisions.

In comparison, retail investors are perceived as lacking enough knowledge to be successful and tending to act in an irrational way. Retail investors are tracked for their market sentiment, measured by fund flows and the first-day performance of initial public offerings. AAII’s weekly Sentiment Survey is an industry-recognized representation of individual investors’ confidence or lack thereof in the financial markets.

Vulnerable to behavioral biases, retail investors can, at times, move in large aggregate numbers in and out of stocks in such a way that can cause big price moves. Recent attention on retail investors is due to a series of ongoing events involving sudden stock movements, with the run-up in GameStop Corp. (GME) stock earlier this year the prime example.

However, retail investors do not necessarily lack discipline, act in unsophisticated ways or lack significant wealth.

What’s an Accredited Investor?

Some retail investors are accredited, which means they are allowed to invest in private companies or equity that may not be registered with the SEC. Accredited investors satisfy at least one requirement regarding their income, net worth, asset size, governance status or professional experience. Accredited investors can be retail or institutional investors.

Accredited investors have assets of $1 million or income of $200,000 per year. The SEC recently widened the allowance to include those with FINRA licenses, knowledgeable employees of a private company and family offices with more than $5 million in assets.

Retail Investor Advantages

There are strategies that retail investors can employ that institutional investors cannot for long-term portfolio success. The key as a retail investor is to remember your individual needs and your ability to assess them. An institutional investor faces limits on the types of portfolio strategies and tactics they can use because of the sheer amount of money they have to invest. Plus, individual investors never have to report their performance. The money managers hired by institutional investors are frequently judged on their performance relative to a benchmark. This can lead to a constant changing of investment strategies and managers by institutional investors.

AAII’s Model Shadow Stock Portfolio is an example of a strategy that takes advantage of retail investors’ characteristic of being “small” investors. Its leading principle is that the best stocks for individual investors are not the same stocks that are best for institutional investors. The Model Shadow Stock Portfolio’s performance bucks the belief that retail investors cannot compete against institutional, professional investors.

In general, the increased attention on individual investors is indicative of their slightly increased market power. Retail investors are benefiting from competition among online brokers that is driving costs down to the point of no longer being a barrier to entry for many potential investors. Online brokers are also increasing the technology and education they make available to their customers as part of this competition.

Banks and brokers have a lot at stake for capturing retail investors. Retail investors as American households directly and indirectly own $29 trillion worth of equities—more than 58% of the U.S. equity market, according to the SEC.

Retail investors are of great importance to the U.S. economy and financial markets. They tend to invest for a longer period than institutional investors, providing long-term sources of capital for firms, especially smaller ones. The $29 trillion that households account for in equity plays a huge role in building the stock market. No doubt with what some individual investors have set in motion in 2021, there is a renewed concern for safeguarding the interest of retail investors.