What is Retail Investing? Definition and Trends

The stock market has become more accessible to anyone. Online brokerage firms and investment apps allow people to buy and sell stocks in a few clicks. Investors can find the latest stock prices by looking them up online instead of by reading the newspaper. It’s easy to visit its online investor relations page to learn more about a company, but investors back in the day had to visit the local library. The ease of investing and quick access to relevant information has created a retail investing boom. Understanding how retail investing works can help you achieve returns with a portfolio that aligns with your risk tolerance.

How Does Retail Investing Work?

Retail investing refers to trading stocks on brokerage platforms. Retail investors do not work for investment firms and act with their own dollars. Not every retail investor has received a formal education in finance and stock analysis, but these investors learn the fundamentals and expand their knowledge as they go. These quick steps will walk you through how to become a retail investor. 

1. Opening an Account 

A retail investor must begin the process by opening an investment account with a brokerage firm. Investors can choose from many types of brokerage accounts that each have a wide range of features. Some accounts help you set up individual retirement accounts, while others give you more flexibility over which assets you can buy. Many retail investors trade stocks, but some retail investors also want to buy crypto. If you want to get into crypto, make sure your broker enables crypto trading.

2. Placing Orders and Executing Trades

After you open an account, the next step is to add securities to your portfolio. You will have to place orders and execute trades on assets you believe can generate a positive return. A lot of research goes into stock analysis, and it is important to feel confident in an investment before allocating capital. Don’t rush to invest just for the sake of getting started. Investors can start with established companies or funds to minimize their risk.

Most investors use market orders that let you buy an asset at the current price. However, you can also use a limit order, which only executes a buy or sell order once it hits your desired price. Brokers execute limit orders on your behalf.

3. Holding and Monitoring

When you invest in a stock or bond, your returns depend on a company’s performance. Bonds only get paid if the company remains solvent, and stocks only appreciate if the company grows. Investors should periodically monitor their investments and decide whether to add to their positions or trim them. Review the earnings reports of the corporations you are invested in or have on your radar.

4. Portfolio Management

Retail investors manage their portfolios and make adjustments based on how their goals and assets change. Investors should keep their goals and risk tolerances in mind when making trades. It’s a popular strategy to diversify your portfolio to mitigate risk. If one of your assets performs poorly, other assets can prop up your portfolio. 

5. Dividends and Returns

Retail investors assess their performance by reviewing dividends and returns. Higher returns can indicate more success, but it also depends on how the investor got those returns. Some investors intentionally sacrifice higher returns for stable cash flow from blue-chip dividend stocks. Some dividend investors reinvest the dividend payments to increase future payouts. While it’s nice to get a gain from one of your investments, it’s important to remember that market values can fluctuate significantly. Every investment has a level of risk.

6. Taxes and Regulations

Retail investors have to pay taxes on dividends and realized capital gains. If you report net losses with your portfolio, you can use those unprofitable investments as tax write-offs. Retail investors should consult with tax professionals to understand how their investments impact the final tax bill.

7 Things to Consider with Retail Investing

Retail investing can increase your wealth and help you retire early, but it’s never a good idea to only consider the best-case scenario. Understanding the risks of retail investing and how it can help your portfolio when used correctly can increase the likelihood of success.

1. Investment Goals

Investment objectives help consumers buy assets that align with their long-term goals. Instead of chasing stocks because of recent momentum, investors can stay focused on their key objectives. Investors who want stable cash flow can focus on dividend income stocks. Growth investors tend to prioritize companies with high revenue growth and great potential.

2. Risk Tolerance

Any investment can lose money, but some investments are riskier than others. The S&P 500 has outperformed Treasury bills in 2023, but the S&P 500 also poses more risks than T-bills. Tesla stock has rewarded long-term shareholders but is a higher-risk stock than average. Can you bear the risk of Tesla stock losses for the chance at significant long-term returns? The closer you are to retirement, the more defensive you should probably become with your investments.

3. Research and Due Diligence

Investors should conduct thorough research on a company before buying shares. Each investor has a different process for research and due diligence, but you can get a lot of insights from a company’s investor relations page. This page covers recent earnings reports, events and other information about the company. Reviewing recent changes to revenue and net income can give you a gauge of how a company is performing.

While revenue and earnings growth are important, good numbers can get overshadowed by an excessive valuation. Investors should look at metrics like the P/E ratio and PEG ratio when making decisions. Each investor focuses on different metrics, but you should look at several of them at first and then decide which ones you will prioritize in your research.

4. Cost and Fees

Brokerage firms charge fees for trading certain assets, and some of those fees are higher than others. Retail investors can look at the expense ratio for a mutual fund or exchange-traded funds (ETFs) to assess their expenses. You should steer clear of funds with high expense ratios and brokerage platforms with excessive fees for stock trades.

5. Tax Implications

Your investments have tax implications anytime you sell assets or receive a dividend. Understanding how taxes impact your total returns and next year’s tax bill can help you make smarter decisions. Many investors unload their unprofitable investments near the end of the year to lower their taxes. You must wait at least 30 days before purchasing the same shares to keep the net loss and avoid the wash sale rule.

6. Regular Monitoring and Rebalancing

Your investments will go through significant changes over time. A company that once achieved 30% year-over-year revenue growth may slow down to 10% year-over-year revenue growth. The investment thesis will look different, and it’s important to assess if you should still hold onto the stock. Retail investors do not have to look at their portfolios every day, but monitoring investments at least once a week can help you stay on top of important developments.

7. Psychological Factors

Stock analysis requires looking at financials, news and other factors. While investors should let logic dictate their decisions, emotions often get in the way and can impact returns. Some investors hold onto stocks longer than necessary because they like the company. It’s good to hold onto good investments, but good investments can become less desirable over time. Investors may also engage in revenge trading to recoup a loss quickly, and this activity can amplify total losses. 

Before making an investment, ask yourself if you have thought it over or if your emotions led you to this point. Investors should also not let short-term price fluctuations change how they feel about a company’s long-term future.

Advantages of Retail Investing

Retail investing offers several benefits for consumers. Here are the key perks:

• The ability to earn more from your money than keeping it in the bank
• Portfolio diversification
• Cash flow from dividends and interest
• Low barrier to entry
• The ability to quickly exit investments if anything changes

Disadvantages of Retail Investing

While retail investing offers several benefits, it’s important to keep the disadvantages in mind. Here are some factors to consider:

• Time-consuming to learn about the stock market 
• Staying on top of investments can be overwhelming
• Possibility of market volatility and risks that can result in losses
• Risk of emotional trading

Embarking on the Retail Investing Journey

Retail investing allows you to do more with your money. You won’t have to settle for a savings account interest rate below 1% APY. Investors can earn much more by putting their cash into stocks, bonds and other assets. You can learn by reading resources, practicing with stock simulators or small sums of money and reviewing your performance.

Frequently Asked Questions