What is a retail investor?
So, what exactly is a retail investor? It’s someone who buys and sells bonds, stocks, mutual funds, ETFs, or other securities for themselves instead of on behalf of organizations or other individuals. That means retail investors keep all the profits they make on investments and don’t have to share them with anyone else.
As retail investors trade securities for their own personal accounts, they often buy and sell more conservative amounts, and usually through brokerage firms. However, they might use a financial advisor or planner to help them make smarter investment decisions, reduce risk, and generate bigger profits. That makes them different from institutional investors who work for organizations and other individuals. Because retail investors manage their own accounts, they might pay higher commissions for their trades, which isn’t great. However, brokerage fees have decreased in recent years, making these investments more affordable and available to a wider audience.
Retail investments come with an element of risk, so as a retail investor you might invest in stocks in more stable companies with lower price points. Alternatively, you might buy fractional shares, which allow you to invest in companies with high share prices. However you choose to trade, it’s now possible for you to own a diverse investment portfolio that might comprise stocks, bonds, crypto, real estate, mutual funds, or exchange-traded funds (ETFs). The choice is yours! With the right investments, you could generate huge profits as your money starts working for you.
One benefit of becoming a retail investor is that there’s little tax paperwork required, which is definitely a plus. You only need to pay capital gains tax if you actually sell one of your investments at a profit. If you had the investment for less than one year, you’ll pay capital gains tax at the same rate as your regular income tax. That’s a lot less than some other investors. If you had the investment for more than a year, you’ll pay capital gains tax between 0-20%, depending on your tax bracket.
Retail investor case study
An investor in Austin wants to buy and sell stocks for herself and generate some profit on the side. She develops a portfolio that comprises stocks in small companies with low price points and fractional shares in larger companies. She also hires a financial advisor to help her choose the right stocks and to reduce risk.
This investor manages stocks through an online brokerage that charges a commission of 2% based on her assets. She sells 100 shares of X company after making a decent gain of 15%. Because she held the investment for less than a year, the investor pays capital gains tax that is equal to her regular tax rate of 22%.
The bottom line
A retail investor is a non-professional investor who buys and sells stocks, bonds, mutual funds, and other securities for themselves instead of on behalf of an organization or another individual. So they take all the risk, and they keep all their investment profits. Retail investors often carry out their trades through their own personal accounts and trade in small amounts. There is also much less tax paperwork involved compared to that of an institutional investor.