Who are retail traders, and what do they do? Retail trading has grown exponentially in the last few years. The financial markets attract a vast array of people from various backgrounds. From retail traders to large hedge funds and institutional investors, the financial markets are a battlefield with various soldiers skilled in dynamic aspects.
But, no matter who the participant is, they all have one goal and objective: making money. All that matters is that you end your day green.
Retail traders are non-professional traders who buy and sell securities for their accounts. Most retail traders invest in stocks, bonds, futures, and options.
Their account size is dramatically smaller when compared to institutional investors and hedge funds. Retail traders use online brokerage firms to trade, paying commissions on each trade. In other words, a retail trader is a non-professional market maker who usually has small capital, trades part-time, or learns the markets professionally.
Generally, retail traders are less knowledgeable about the markets because they don’t have access to the information that large institutional investors typically do.
They’re seen as less disciplined, less skillful, and tend to make emotional errors compared to professional traders. But despite these drawbacks, retail traders are growing and evolving.
With proper education and necessary resources, this category of market participants has seen a huge increase. The good news is that great companies are out there to teach you how to trade.
Retail Traders Are Booming
The global market capitalization of stock markets is around ninety trillion! Each day, millions of retail traders try their strategies and different techniques. What’s their goal? To make a profit and benefit financially from this enormous ocean of wealth.
People often think making money in the stock market is easy and fun. However, the reality is different. You must be passionate and dedicated to making serious money from the markets.
You have to want to learn and gain experience. Which, in time, pays off handsomely. As a result, patience is key. Don’t expect to get rich overnight. No matter what others are promising.
So, who exactly are retail traders? Well, it’s common people like me and you! We’re retail traders here at the Bullish Bears.
Retail traders use their capital to try to make a profit from the markets. The bonus? Retail traders usually trade from home.
However, various types of market participants trade in the stock market. So first, let’s understand in detail who retail traders are.
Retail Trading Casualties of War
However, did you know that 90 percent of retail traders who enter the market tend to lose all of their capital in 90 days? And the broker happily walks away to the bank.
It might seem unfair. But, in reality, 90 percent of traders lose money, and only 10 percent are successful. So, do these successful traders have a secret strategy or some holy grail?
Well, I wish there was a secret strategy or holy grail. But there isn’t. Instead, they have solid market knowledge, good psychology, a proper trading plan, and a professional attitude toward trading.
New retail traders tend to think of trading as a betting game. At the same time, professional traders consider it a serious business. That’s why 90 percent of retail traders go broke in 90 days.
Now, apart from retail traders, there are a lot of other market participants who trade and invest in the financial markets. So let’s understand them in detail. How do they differ from retail traders?
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Types of Market Participants
The stock markets have many participants, ranging from small retail traders to large institutional investors and hedge funds. So, let’s understand each participant in detail.
1. Hedge Funds
Hedge funds are a partnership between wealthy investors who pool their money and place a fund manager in charge of the capital. The hedge fund manager trades the markets using that capital to generate good returns.
These funds are managed aggressively. And they often make use of derivatives and leverage to create higher returns. While investing in a hedge fund may seem attractive, they’re generally accessible only to accredited investors.
2. Mutual Funds
Mutual funds are large pools of funds collected from various investors. Then, they’re invested in various investment vehicles like stocks, bonds, and other securities.
Mutual funds give small and retail investors access to professionally managed and diversified portfolios. Several kinds of mutual funds are divided into categories.
These categories are represented by the type of securities they invest in. However, they also charge a fee for managing your money. Generally, the returns they offer aren’t that attractive.
3. Insurance Companies
Insurance companies are also a form of institutional investors. They collect the premium from their customers and deploy it in the stock markets to generate returns.
4. Proprietary Trading Firms
As keeping money idle won’t bring any benefits, insurance companies often use their premiums as capital in the stock markets and invest and trade.
Proprietary trading firms are also known as “Prop trading.” This refers to a financial firm or commercial bank which invests and trades directly in the financial markets.
They employ a large number of professional traders and have huge capital. Their investment vehicles can range from stocks, bonds, commodities, forex, etc.
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Retail Traders and Institutional Investors
Trading in the financial markets can be as simple as pressing the buy or sell button. However, professional traders use complex and advanced strategies combined with risk management and perfect setups. This typically leads to great profits. So, let’s understand the differences between retail traders and institutional investors.
Large institutional investors and hedge funds have enormous capital to deploy in the financial markets. At the same time, retail traders have small and limited capital with which to trade.
This difference in capital gives institutions and hedge funds a huge advantage over retail traders. They can trade in various instruments and often have inside information advanced and superior technology.
They can place large volume trades. This can impact the share prices to a huge extent. Retail traders can’t place trades that turn the tide of share price.
Attitude and Mental Approach
Professional traders and fund managers take trading seriously. As a result, they master and learn the art of investing and trading before they venture into the markets with money.
Retail traders open a trading account online and start trading the next day without proper knowledge and experience. This leads to huge losses.
Other market participants take advantage of this. A professional trader’s overall attitude and psychology are completely different from a retail trader’s.
They have to trade other people’s money. How differently would you trade if you were trading money that didn’t belong to you? If it’s a lot different, you need to change your mentality.
This is a 5-minute chart of $AAPL. Take a look at the large volume bars and candlesticks.
Trading Volume and Position Size
Professional traders and institutions often trade with millions of dollars. Retail traders don’t have that kind of money as their capital.
So, when an institution or fund uses its capital to trade or invest in a stock, it can result in huge movies. That isn’t possible for a retail trader to do with their small capital.
This gives institutions and funds a huge advantage. And they use it to their benefit. They generally use sophisticated trading strategies and proper risk and money management. On top of that, they have the best professional traders working for them.
Types of Financial Markets
Apart from the stock market, there are other types of financial markets where people trade. The financial markets include various vehicles like the stock market, forex market, commodities markets, bond markets, etc. All these markets are traded similarly and serve a similar purpose, just like stock markets, to make money.
Commodity markets are a marketplace for buying, selling, and trading in the major commodities of the world—for example, crude oil, metals, agricultural commodities, etc.
Traders and investors deploy their capital in this market with the same objective of generating returns. They do this from speculation and changes in the price of commodities. Let’s take a look at the differences in the financial markets.
Ownership of Assets
The most popular way to trade for investors is to buy and hold. Over time, the security price may rise, leading to a profit. However, there’s no ownership of commodities in the commodities market.
Instead, all the trading is done in future contracts. Therefore, commodity derivatives are only traded and never owned.
Compared to all the various asset classes, the commodities market tends to be the most volatile. As a result, it can often have extreme price moves, which can be difficult for traders to sustain.
This is due to the lower liquidity in commodity markets. And because it’s affected by the ever-changing external factors. For example, supply-demand and geopolitics, which are hard to interpret.
Participants buy, sell, exchange, and speculate on currencies in the Forex market. This huge market comprises banks, central banks, commercial and financial companies, hedge funds, retail forex brokers and traders, investors, etc.
Out of all the financial markets, the currency market is one of the largest financial markets, with a daily transaction of over five trillion dollars.
Retail Traders & Exchanges
The market and securities are traded on stock exchanges. This allows participants to sell and purchase securities. The Forex market and its trading are done via over-the-counter contracts.
Unlike the stock market, there is no centralized exchange for this market. All the transactions are done privately. Thus, it is completely different from the stock market.
There is another major difference between the stock and forex markets. When trading forex, one has to buy and sell the currency simultaneously.
However, it’s completely different in the stock market. This may make the forex market a bit complex for a beginner. However, one has to trade in pairs in the forex markets.
Difference in Liquidity and Volume
The stock market holds a huge amount of daily volume of traded securities. At the same time, the forex market offers a much larger liquidity pool.
It’s one of the biggest in the financial markets. And this makes it an attractive market for large institutions and funds with gigantic capital.
Dark Pools are places where equities change hands without traders seeing them until the trade is filled and reported to the tape. Massive volume and big trades tend to happen here and have become a hot target for retail traders to track in recent years.
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Retail Trader Advantages
- Small brokerage accounts
- No pressure unless it’s your living
- You can limit your risk
- No disclosing trades in retail trading
1. Small Capital for Retail Traders
Sometimes, having small capital can benefit a trader—some stocks with potential need to be bigger to absorb the position size of institutional traders.
But being retail traders, we can easily invest a good amount in such stocks and earn great returns. Big returns are the goal of any trader. However, don’t get greedy.
Being greedy is the best way to blow up your account. And as a retail trader, that usually means you don’t have millions or even thousands of dollars to play with. Therefore, you need to be smart about trading! Some traders will use big money tools like Zacks or IBD to help them make trading decisions because these companies do a lot of research. They also tend to have a lot of influence with their large user base of retail investors.
One benefit that retail traders have is that they don’t have to trade every day. At the same time, institutional traders have to trade daily.
They have to generate returns for their investors. And thus, it adds a sense of pressure to the trader’s mind. Think about being forced to trade daily, even when the setups are terrible.
We’re lucky we can walk away when setups aren’t there. And we should! Don’t trade if you don’t see a play.
2. Low Risk for Retail Traders
Another benefit of retail traders is that their risk is significantly low in each trade. As a result, a loss can be sustained.
If an institutional investor enters a trade, they can move the market. The risk they take is far greater and very sensitive to price movements.
Large funds and institutions are regulated and have to disclose some information about their holdings and activities. This makes it difficult for them to outperform the market.
As retail traders, we don’t have to disclose anything. As a result, we can trade according to our preferences.
Disadvantages for Retail Traders
- Commissions and fees from brokers
- Institutional traders get more information and have better technology
- Retail traders have less capital, resulting in less leverage
Commissions, Spreads, and Other Costs
Large funds and institutions have the upper hand and often bargain for better execution rates and margins. And they get great deals.
Whereas retail traders don’t have this luxury. We often end up paying huge commissions and broker fees. However, many brokers have been going the route of $0 commissions.
While we love that, it does affect trades. For example, when ThinkorSwim went to $0 commissions, their trade executions suffered. You get what you pay for.
Having large capital has its benefits. This includes access to the latest and best information before anyone else. And institutions and funds also have superior technology and terminals.
They’re required to trade efficiently and smoothly. However, retail traders can’t afford such facilities. Even the gurus don’t have the technology that institutions have.
Large funds and institutions have access to better leverage. As a result, they can generate a huge return with their capital.
Retail traders have limited margins, and their capital size often isn’t adequate to earn a decent and good amount from the markets. However, check out futures and options.
Final Thoughts
Now, with all the information on retail traders, we hope you have gained some knowledge and are aware of the participants in the financial markets.
With this knowledge, you can prepare yourself better for your trades by tracking the activities of these large funds and institutions. This can give you an edge in the markets.
With proper knowledge and skills, anybody can master the art of trading and investing. However, one has to have the passion and determination to learn. So go ahead and dive into the exciting and amazing world of trading!
Frequently Asked Questions
The most successful retail traders can make six figures or more per year. Retail traders are not paid a salary, so their income is decided on how good of a trader they are. Most traders are not profitable.
Retail traders can make money if they discipline themselves to learn a specific trading style and use risk management techniques. It isn't easy to make money consistently as a trader, but it's possible.
A stock broker usually works for a firm and buys and sells securities for their clients. Retail traders make trading and investing decisions on their own.
