What it is:
A retail investor is an individual who purchases securities for his or her own personal account rather than for an organization. Retail investors typically trade in much smaller amounts than institutional investors such as mutual funds, pensions, or university endowments.
How it works (Example):
Retail investing generally occurs through four channels: individual investors, retail brokers (who act at the direction of these individuals), managed accounts (whereby the account manager makes the buy and sell decisions for the individual), and investment clubs (groups of people who pool their money to make investment). According to the Investment Company Institute and the Securities Industry Association, over 50 million U.S. households engage in some type of retail investing.
Why it Matters:
Retail investing activity pales in the shadow of institutional investing activity. Not only do retail investors make smaller trades, they also tend to trade less frequently than institutional investors, which account for most of the market's trading volume. However, the widening use of online trading and better access to financial information has increased the number of retail investors in recent years.
Retail investors typically exert less influence over corporate decisions than larger, institutional shareholders. Although there is some controversy over whether a high level of institutional ownership improves a company's management, there is no disputing the fact that an institutional shareholder with 10,000 votes usually wields more influence than an average retail shareholder with just 100 votes.
As opposed to institutional owners, small investors seldom have access to corporate boardrooms or discussions and rarely have the opportunity to meet personally with a company's executives. For this reason, many retail investors tend to regard institutional ownership of a security as a sign of approval and are easily influenced by institutional trading activity.