Updated October 1, 2021

The excitement and potential profit of buying and selling stocks is not limited to big banks or Wall Street investors alone. Millions of retail investors participate in the stock market by buying, selling, or holding stocks, bonds, mutual funds, and other equities.

Pros and Cons of Being a Retail Investor

PROS

• Smaller Investments
• Less Paperwork
• Liquidity

CONS

• Fees
• No Guidance
• No Tax Benefit
• No Bulk Buying

As you might guess, there are many different types of investment opportunities, and every different type of investment opportunity offers its own appeal to each and every individual investor. Cash flow is the primary reason an individual investor may choose to acquire a rental property or invest in a business. However, this type of investment decision is not often pursued by the average working American, who may feel they don’t have enough investment education to pursue real estate investing or business ownership, despite the appeal the recurring income potential through rental income or business profits.

Enter the stock market. Individual stocks can be purchased by anyone legally able to participate in financial markets (namely, anyone who can do so on their own, although most brokerages will only allow people older than the age of 18, and in some cases 21, to open brokerages accounts and perform trades).

As you might know, individual stocks are issued to the public by companies that are trying to raise additional monies for business growth. They raise this money by selling off shares to individual investors and institutional investors on a securities market like the New York Stock Exchange or NASDAQ. People buy, sell, and hold these stocks in an attempt to make money off price fluctuations or to build an investment portfolio that swells with the flow of dividends. The stock prices of individual securities change with investor confidence in the company, among other factors.

Participating in the stock market as an individual, not a company, professional stock trader, or broker is called being a retail investor.

What is a Retail Investor?

A retail investor is a non-institutional investor in stocks, bonds, mutual funds, or other securities.

You could say this is the average American who buys or sells stocks or builds a portfolio through a stockbroker or retirement plan. Most retail banking institutions where customers keep a checking account or savings account also offer online brokerages, where customers can buy or sell stocks themselves.

Generally, stock trading websites charge a small, nominal fee to purchase a security. In recent years, there has also been a proliferation of apps that allow retail investors to buy fractional shares of securities if they cannot afford to purchase one share of the security in its entirety. This allows retail investors with limited funds to participate in the purchase of stocks like Amazon, which at the time of this article was valued at more than $3k a share.

Pros of Retail Investing

Smaller Investments

The beauty of the stock market is that anyone can purchase a share of stock or shares of stock in any publicly listed company. These stocks offer a share of ownership in a company, albeit, in most cases, a small one. However, if someone purchases enough stock shares, they can obtain a controlling interest in the company.

Most working individuals who choose to invest in the stock market are not able to spend six or seven figures on an investment. Even individuals who are day traders must operate with a minimum of $25,000 invested, according to the SEC. However, a retail investor can put a smaller, more affordable amount of money into the stock market.

In most cases, retail traders make their income outside the financial markets, usually through employment or self-employment. This means that market volatility will not impact the fixed income used to cover their living expenses, so the failure of one investment opportunity will not break their portfolio. Despite the periodically smaller amounts of capital involved in retail investing, over time, these investments can snowball into an ample retirement account. This is why many retail investors leverage the guidance of financial services providers to put their cash into stable investment opportunities with long-term growth.

Less Paperwork

Institutional investors and individuals who buy considerable shares of stock are required to fill out forms by the Securities and Exchange Commission. These forms are meant to foster a culture of market transparency and trust in the stock market by preventing circumstances like insider trading.

Individuals who buy and sell stocks, hoping to make a profit at the end of the year by day trading taxes, must also fill out paperwork when it comes time to do their taxes. A retail investor who signs on to their Merrill Lynch dashboard or logs into their RobinHood app to buy or sell stocks or check on their retirement account does not need to worry about any of that paperwork unless they make more than $53k selling stocks. If this is the case, the investor will have to pay long-term capital gains taxes for securities held for more than one year, and short-term capital gains taxes on securities held for less than a year.

Liquidity

Retail investors are not tied to their portfolio with onerous agreements that bind them to a particular course of action or asset, such as someone who invests in real estate.

A retail investor can very quickly liquidate their stock portfolio or shares in a mutual fund, especially if they have a brokerage account. This can be as simple as logging into their investor dashboard and hitting the sell button. However, if the investor has their stocks and bonds and other investments in a tax-deferred retirement account, they will have to pay taxes upon its liquidation, just like capital gains taxes. If the retirement portfolio is managed by a third party, they may have to wait longer to receive the value of the sold assets in cash.

Cons of Retail Investing

Fees

Retail investors will not be able to avoid fees. In some instances, these fees could be higher than the fees and commissions paid by institutional investors who make larger purchases. By and large, though, these fees tend to be only a handful of dollars for every trade placed, which is generally not a huge deterrent for individuals looking to add to their stock portfolio.

If someone who buys and sells stocks obtains the coveted tax trader status from the IRS, they can write off these fees and commissions as a business expense. They also enjoy other perks, such as tax loss harvesting—selling stocks at a loss to reduce their tax burden.

Newcomer apps to the retail investing industry tote their lack of fees, but behind this feeless structure may be subpar pricing that helps the brokerage cover the “free trades” it offers to consumers.

No Guidance

Perhaps the main drawback to being a retail investor is the lack of guidance around buying and selling stocks. In fact, for risk-taking individuals, this lack of guidance can become disastrous.

Most people know someone who has lost a lot of money in the stock market because they decided to load up on tech stocks or a company they were convinced was going to go big. Of course, sometimes that really does happen, but for most individuals, trading with a high degree of risk has unfavorable results, and many retail investors are not able to assess this risk in terms of each individual stock.

When it comes to investors who are more risk-averse, a lack of investing education means their money can languish in a poorly managed retirement account that could be growing more effectively under a different plan. Retail investors usually don’t know the ins and outs of how to find good stocks, especially as it relates to metrics like price to earnings ratio or dividend yield. Thankfully, there are many resources available that teach the basics of stock market investing for those who want to try their hand at retail investing.

No Tax Benefit

As previously mentioned, you have to obtain tax trader status from the IRS before you can treat buying and selling taxes as a business. Otherwise, buying and selling stocks does not bring many taxable benefits.

While self-employed individuals can write off business expenses like a home office, they cannot write off personal equity investments in the stock market or a retirement fund unless they have structured their self-employment as a corporation and put themselves on a payroll that makes matching contributions to the 401(k) of its employees.

Typically when it comes to stock trading taxes, retail inventors will not need to think about the stocks they buy and sell unless they earned more than $53k from the sale of securities. The stocks they retain in their portfolio do not get taxed, even if the price goes up.

Day traders who can show that their primary business activity is buying and selling stocks and who meet other requirements of monetary investment and frequency, as defined by the SEC and IRS, can treat their stock trading as a business activity and retain certain tax benefits. Unfortunately, this opportunity is not available to retail investors who contribute regularly to a retirement account, even if they attempt to buy and sell stocks for profit.

No Bulk Buying

When it comes to shopping, retail buyers pay the most money. Store owners pay less for the goods they sell because they buy in bulk.

Similarly, retail stock investors do not have wholesale options. This is in contrast to professional investors, like Warren Buffet, who can get on the phone with a company and purchase a sizable amount of stock. In these instances, day traders may obtain special pricing for their bulk purchase.

Technically speaking, retail investors can purchase as much stock in any given company they want, but if they purchase more than a certain amount, they will have to declare that on SEC forms and file other regulatory paperwork. By and large, however, most retail investors will not be purchasing that much stock at any given moment in time, so special deals and pricing discounts are irrelevant.

Retail Investing is an Opportunity to Build a Solid Investment Portfolio

The vast majority of people fall into the category of being a retail investor, and it’s a title that every working American should embrace as an opportunity.

Inflation lowers the value of money over time, meaning that dollars socked away in an average bank account actually costs money. By contrast, stock market investments typically increase in the long term, even if they bounce around in the short term.

Every working American should be regularly investing in the stock market and building a retirement portfolio of secure stocks that will stand the test of time. You don’t have to do it alone though.  Anderson Advisor’s retirement and tax planning professionals are available to help create a plan that meets your individual investment goals. Schedule a strategy session today by calling 1-800-706-4741.

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