What is Retail Trading?

Stock trading has become more accessible over the years. Stock ownership was a luxury in the 1950s, with only 4.2% of Americans owning stocks at the time. Now, 53% of families own stocks in large part because online brokerage services and other innovations have made stock investing more accessible. These changes have made retail trading more open, allowing anyone to get into stocks. Retail traders have flexibility, and they don’t have to be professionals to get started. This guide will cover how retail trading works and how it compares to institutional trading.

How Does Retail Trading Work?

Retail trading is an approach where consumers trade for themselves without holding an occupation related to investing. Most retail traders invest on the side and make their full-time income from another occupation. 

Retail Traders and Their Goals

Retail traders aim to generate a return from their investments, but they have their own approach to achieving that objective. Some retail traders buy and sell stocks, while others engage in riskier trading strategies, such as options that expire in less than one week. Retail traders have varied expectations and targets, but they all want to make money by trading stocks on the side.

Types of Retail Traders

Retail traders incorporate various trading strategies in the pursuit of higher returns. These are some of the most common types of retail traders.

Position Trader

Position traders take a long-term approach to their investments. These traders focus on a company’s fundamentals and can hold onto stocks for months or years before exiting their positions.

Day Trader

Day traders aim to capitalize on price fluctuations and focus on technical analysis. Some day traders exit all of their positions before the end of the day to avoid dramatic price swings in after-hours.

Swing Trader

Swing traders hold onto stock positions for a few days or weeks before exiting them. These traders can capitalize on earnings reports, short-term mismatches between intrinsic value and market value, and other trends. Swing traders look at fundamental analysis and technical analysis when making their decisions.

Advantages of Retail Trading

Wondering if retail trading makes sense for you? Here are some of the advantages this approach provides:

• The potential to earn money: You can make money as a retail trader by entering positions and exiting them for a profit. It’s easier said than done, but retail trading creates this possibility. 
• Traders can get started with any amount of money: Some investment opportunities have high minimum requirements. It costs thousands of dollars to make a down payment on a home, and high-yield savings accounts may require high initial deposits. You can get started with fractional trading if you do not have enough funds to buy an entire share of your favorite company.
• Versatility: Retail traders can opt for a long-term approach, day trading approach or something in between.
• More control: You get to decide when to enter and exit positions. If you leave your investing activities to an institutional investor, that investor chooses how your money gets allocated. Institutional investing can also result in surprise taxes even if you do not sell your shares.

Disadvantages of Retail Trading

While retail trading has several perks, it also has a few disadvantages. You should keep these details in mind before getting started. 

• The potential to lose money: Retail trading does not generate guaranteed profits. You can lose money on trades, but it’s possible to minimize your losses with proper risk management.
• You have less experience than professionals: Professional traders buy and sell stocks as their full-time jobs. These professionals know more intricacies about valuing stocks and discovering opportunities. Retail traders have to overcome a learning curve in addition to working full-time jobs. It’s possible and can be rewarding, but you will have less experience when you are getting started. Making smaller trades or using a stock simulator can help you learn without taking on too much risk.
• Emotional trading: Many traders and investors get caught up in emotions as stock prices rise and fall. Emotional trading can result in excess losses and risky positions. If you become a retail trader, you have to do your best to keep your emotions in check and accept that you will lose money on some days.

Institutional Traders vs. Retail Traders

Institutional traders are professionals who use other people’s money to make trades. These people have more expertise, time and resources available to initiate trades. However, it costs a fee to work with institutional traders, which will hurt total returns. Retail traders don’t have additional fees, but the average retail trader does not have as much expertise as the average institutional trader. Retail traders use their own money and do not have as much time available to monitor positions and make trades. 

Retail traders working traditional 9-to-5 jobs will have less time to check their portfolios during critical times of the day. This setup makes it difficult for retail traders who engage in day trading, but swing trading and position trading are more manageable.

Tips for Successful Retail Trading

It’s possible to become a successful retail trader and achieve your financial goals. These retail trading tips can guide you on the path to success.

• Know your financial goals: Retail traders should determine their financial goals before making trades. Keeping your goals in mind can lead to more prudent trading decisions rather than a reckless pursuit of higher returns.
• Manage your risk appropriately: Each trader has a level of risk they deem to be acceptable. Knowing what type of risk you can handle can impact your positions and the amount of funds you allocate to your trades.
• Stick to a trading plan: Day trading, swing trading and position trading are the three main types of retail trading. Sticking with a plan for your assets can potentially lead to higher returns and reduce the likelihood of emotion-driven trades.
• Learn about stock analysis: Fundamental analysis and technical analysis are two critical skill sets for traders to master. Learning a little about each type of analysis can make you a better retail trader.
• Stay on top of financial news: News items can heavily influence the markets, leading to considerable price movements throughout the day. Staying on top of the news can help you predict where the market might move in the future and adjust your portfolio accordingly.
• Know your exit price: The best retail traders set exit prices to lock in gains. Some traders make the mistake of riding gains for too long and then watching as their capital gains evaporate.
• Limit your losses: Setting stop-loss orders limits how much you can lose from a single trade. Setting these orders when you initiate a trade can make it easier to walk away from an unprofitable trade before it gets worse.
• Accept that you will have losses: No matter what you do, you will have losing trades. Don’t let them bring you down but learn from them so you minimize the likelihood of future losses.
• Diversify your trades: Spread your money across several trades instead of allocating all of your capital to one high-conviction trade. Spreading your capital minimizes risk.
• Know when to take a break: Just because you can trade every day doesn’t mean you should trade every day. Know when to take a break, mentally recharge and then get back to trading when you feel ready.

Best Retail Trading Platforms and Brokers

Retail traders can save on fees and increase their returns with the right broker. Wondering which one makes sense for you? These are some of the top retail trading platforms and brokers available.

Build Your Portfolio with Retail Trading

Retail trading can help you realize higher returns and achieve your financial goals sooner. Keeping your objectives in mind while entering positions can increase your likelihood of success. Retail traders do not have the same hours or expertise as institutional traders, but experience is the best teacher. Retail traders can learn the basics and become experts over time.

Frequently Asked Questions