A Retail Investor is a term assigned to an individual investor who is either directly or indirectly involved in security transactions involving stocks, commodities, bonds, and other similar financial instruments.
They can also be people with investments in mutual funds and ETFs or involved in the retail trading of securities by operating through brokerage firms.
According to the Securities and Exchange Board of India(SEBI), India’s stock market regulator, a retail investor is one who applies in an Initial Public Offering(IPO) with an investment of not more than Rs.2,00,000 or someone who holds or transacts in shares worth less than Rs.2,00,000 in a stock.
So a retail investor is a participant with the smallest investment corpus out of all the parties involved in the financial markets.
Classification of Financial Market Participants
The financial markets broadly comprise a marketplace where the trading of financial instruments and securities occurs. The financial instruments include those traded in the stock market, bond market, derivatives market and forex market.
In each of the above marketplace, there are various parties or players who take part in investment or trading transactions. These include governments, banks, asset management companies, other financial institutions and even individual investors.
For the sake of understanding, let us classify each investor type into the following categories:
- Institutional Investors – These include large corporations such as banks, hedge funds, insurance companies, mutual funds, other financial institutions, and even government-run funds and insurance schemes.
- Foreign Institutional Investors – These include investments from all corporate bodies that are located and operate overseas. Basically, all investments in Indian securities from foreign investors fall under this category.
- High net worth Individuals – These are investors who have a huge corpus of wealth. Generally in India, a High net worth individual(HNI) is someone with an investment capacity of over Rs.2 Crores.
- Retail Investors – These are individuals with a small corpus of money who are either directly or indirectly involved in investing and trading of financial securities. In India, typically retail investors are referred to as those with an investible corpus of Rs.2 Lakhs.
Types of Retail Trading Strategies:
Few people take up trading as a full-time profession and see stock/derivatives trading as a fixed source of income. Others see it as a source of passive income generation. Many traders have other jobs or businesses to look after and only trade in the stock markets part-time.
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Depending on the amount of time a person can dedicate towards trading, we have classified retail trading strategies as the following :
- Scalping – This is a type of trader who is actively involved in the markets on a daily basis and is a professional trader. Scalpers try to take advantage of the slightest movements in the stock prices and trade on a minute by minute basis. This is a high-pressure job and takes years of practice to perfect.
- Intraday Trading – This is another type of trader who is involved in the markets on a full-time basis. But when compared to scalpers, they are under lesser stress. Usually, intraday traders try to take advantage of daily or hourly price movements in the price of a security. They hold a position for a maximum of 1 day.
- Swing Trading – Swing traders are those who hold security positions for more than 1 week. They take positions for a slightly longer period than the above two. Swing traders can be full time or part-time traders. They try to take advantage of a higher price movement.
- Positional Trading – These are generally traders who do not take part in trading activities on a full-time basis. They make a position in the security and can wait for a couple of months before booking their profits. They usually look for bigger margins of profits as their holding periods are much longer.
Benefits of Trading/Investing
- Investing in stocks or other financial securities is a great way to generate additional income from a passive source.
- Our savings if merely kept at the bank depreciates in value due to inflation. Investing it in various financial instruments means that we can beat inflation in the long run.
- Investing in asset classes such as stocks, bonds or mutual funds can result in significantly higher returns than storing the money in a bank or a fixed deposit.
- If you are someone with enough free time in a day then part-time trading can be a secondary source of income.
- Investing a portion of your monthly earnings goes a long way in helping you achieve financial independence faster. Basically, you can retire earlier by investing early.
How to become a Retail Trader
To become successful in any field requires continuous learning, years of practice, and dedication. The same can be said for a retail trader. Many people are of the assumption that stock or commodity trading is a source of quick and easy money. But this is far from the truth.
The whole idea of trading is to take advantage of the short term movements in prices of securities. The art is to be able to identify before others when such movements happen and to make a position in that security accordingly.
To be a successful trader, one has to have the following traits:
1. Knowledge about the security:
A trader needs to have a detailed understanding of the security he trades in, be it stocks or commodities. The study of the financial markets is a very wide subject, but for better understanding, we divide the subject into 2 distinct categories. Fundamental Analysis and Technical Analysis.
Fundamental Analysis – is the study of a range of factors affecting the value of security such as the economy, industry, management and financial soundness. It also includes a deep knowledge of how to analyze financial statements such as the balance sheet and cash flow statements. It is a study predominantly done by long term investors. The idea is to find the intrinsic value of a stock.
Technical Analysis – on the other hand is very much different from Fundamental Analysis. It is a study which focuses on identifying opportunities looking at historic trends in the movement of a security’s price and volume. It is a system which is used by short term investors/traders. Technical analysis does not include the search for the intrinsic value of a security.
2. Developing a unique strategy:
Just having the theoretical knowledge of a subject is not enough. One needs to develop a trading strategy which is unique and profitable. Having an edge over others is something which is very important. So to develop a unique trading system which one has practiced over the years is one such method to have an edge.
One of the most critical requisites to be a successful trader is to adhere to your trading strategy. Not giving in to emotions such as greed and fear is essential. Putting in place a strict stop-loss is another aspect of having a disciplined approach to trading. According to most successful traders worldwide, discipline is one of the most important factors for maintaining consistency in returns.
Rise of Retail Trading in India
A profession that has seen rampant growth in India and is ever so rising is that of a stock/derivatives trader. Day trading is the practice of buying and selling financial instruments within a single day.
With the rise of the internet, many people have taken up online trading in stocks as a profession. Day trading can be very lucrative if one can master the skills required to be a successful trader.
Many part-time traders, both young and old have been quitting their jobs to take up stock trading as a full-time career alternative. The work from home culture has instilled greater interest in the stock markets amongst people as a source of making quick profits.
Many online stock brokers have registered more new users in the last 6 months than they have ever done in all of their years of existence. According to media reports(link), popular online brokerage firms such as Zerodha and Upstox have seen over 100% growth in account openings during the Covid quarter.
In India it is estimated that there are about 2 crore retail trading participants who are either directly or indirectly invested in the stock markets. But for a huge population like ours, there is huge growth potential.
Even though retail investors in terms of a number of participants is far higher than the number of institutional investors at any given time, the real influence they make on the price of a security is insignificant.
To largely impact the price of any financial security, a large amount of wealth is required. Something which the retail trading category lacks.
It is widely believed that most retail investors do not possess the proper knowledge of the financial instruments they invest in. In looking to make easy gains from the financial markets, they invest solely based on the advice of other investors.
As a result, most of the time during a market crash, they are the ones who suffer maximum losses and through crowded trades, cause situations of either FOMO(Fear of missing out) or panic selling.
To protect the retail community of investors and traders, the government through its regulating body SEBI, and many other institutions are actively involved in spreading awareness about the risks involved in the capital markets.
A good example of this would be the YouTube channel run by team ElearnMarkets which hosts weekly shows with various stock market experts known as the Face2Face series. This show focuses on a practical approach to learning about the stock markets by inviting well-established stock market traders and investors.
So choosing retail trading or investing either part-time or full time can be a fairly profitable career choice but just like any other profession, learning and practice plays a very important role.