Retail Traders

Every day, billions of financial transactions are made by retail traders. Millions of average investors log into their favorite trading app, interactively scan financial charts, and place their bets on stocks, currencies, and commodities (often sitting like a couch potato in their living room).

Despite the absence of tailored suits and people sitting behind glass walls of office buildings, retail traders are as evident now as ever. Retail traders, enabled by technology, real-time data, and low-cost trading platforms, are altering the behavior of the trading community, and if not changing the notion of what "moving the market" means.

The accessible financial markets provide a fascinating perspective on the democratization of finance, allowing us to understand who retail traders are, how they trade, and why they make decisions.

Who Are Retail Traders?

Retail traders are individual investors who use their own money to buy and sell financial instruments like stocks, bonds, currencies, commodities, and cryptocurrencies. Unlike institutional traders, they don’t manage funds for others and usually trade in smaller volumes, but their collective activity has a significant impact on market liquidity and volatility.

Retail traders can be students, professionals, or retirees, making their own investment decisions using tools and platforms available to the public. In the crypto market, their role has become even more prominent due to easy access, active participation, and influence on price movements.

The Rise of Retail Trading

For most of human history, the general public has had almost no access to financial markets, with access limited to professional traders or affluent investors. The barriers were too high, both in transaction costs, technology, the need to go through a broker, in short, your average.

Joe was not able to invest with anything close to the ease of today.

This began to change in the late 1990s to early 2000s, with the advent of online trading platforms. The real movement to the forefront was during the 2010s, as mobile trading apps, commission-free trading, and social media have made it so markets are now literally a click away for anyone. Events like the GameStop short squeeze in 2021 showed the public that individuals can coordinate retail trading and can make a perceptible change to stock prices, something that would have seemed inconceivable just 10 years earlier.

Tools and Platforms

Retail traders now have every tool they need that, at one time, were thought only to be accessible to professional traders:

• Mobile Trading Apps – Robinhood, E*TRADE, eToro, etc. and allow immediate market access from a smartphone.

• Real Time Market Data – Many free and low-cost services provide live price charts, news feed, and market analysis.

• Educational Resources – Online workshops, YouTube videos, and trading communities allow traders to change the way they trade.

• Social Media & Forums – Websites like Reddit's r/WallStreetBets allow traders to share ideas, trading plans, and whatever inflammatory and hyped information on specific stocks they may have.

Common Strategies for Retail Traders

Retail traders will use a variety of strategies based on investment goals, risk tolerances, and time spent trading:

• Day trading - put, day trading involves the buying and selling of stocks within the same day to capitalize on the most ephemeral of market fluctuations.• Swing Trading - Keeping positions open for days or weeks to try to capture some medium-term trends.

• Long-Term Investing - Taking ownership in stocks or ETFs and holding onto them for years while you build wealth incrementally.

• Options Trading - Using calls and puts to speculate or hedge against price action.

• Copy Trading - You can copy traders with more experience using sharing platforms.

While some of these approaches can make you a lot of money, they also expose you to a lot of risks - especially if you're inexperienced.

What are the Benefits of Being a Retail Trader

While retail traders do not have the capability of large institutions, there are benefits of tower trading, including:

• Flexibility - Retail traders can enter and exit positions at will without affecting prices.

• Autonomy - Retail traders have no pressure from clients or shareholders; every decision is theirs.

• Access to Numerous Markets - Retail traders can explore and deploy a good deal of opportunities ranging from cryptocurrency to foreign exchanges.

• Fewer Impediments to Participation - Retail traders do not have to invest large amounts of capital, and they do not have any state-of-the-art infrastructure to work with. Anyone with a smartphone and internet can become a trader.

Risks & Drawbacks

Retail trading has its pros and cons, too. The same things that allow retail traders to be active traders also make it dangerous:

• Emotion - Retail traders generally do not have a formal risk-management or trading strategy, which can make them susceptible to the emotional factors of fear and greed.• Overtrading – Engaging in frequent trader behavior and impulsive trades can chip away at a trader's profits with small (but cumulative losses.

•  Leverage Risks – Borrowing funds to trade can juice a trader's profits, but can also exacerbate their losses.

• Market Volatility – Variable swings in the market can eliminate a trader's position in seconds, especially in markets like crypto that can shift quickly and are often illiquid.

Profitable retail traders often remark on how critical risk management, position sizing, and remaining emotionally detached are to surviving in this business.

How Retail Traders Impact the Markets

While any individual retail trader's impact on a market may be negligible, collectively they can be movers of prices - particularly in stocks that are not liquid. Social media has helped to maximize the benefits of collective action, allowing traders to coordinate around specific trades.

The events surrounding GameStop in 2021 are an excellent case in point: a large number of retail traders who were buying en masse caused the stock to move up from the mid $20s to over $300 at its peak, forcing many institutional short-sellers to incur significant losses. The incident also established retail traders as a market cohort that could no longer be ignored.

The Regulatory World

Governments and financial regulators keep tabs on retail trading habits for market stability and to protect inexperienced investors. In some instances, regulators will put limits on high-risk behaviors like leverage or halt trading in particularly volatile stocks.

Traders often view these as policies overreaching; while regulators state these are critical for disallowing market manipulation, and are essential to keep the public from incurring significant losses.

Future of Retail Trading

There are several indications that technology will supplant human traders or disrupt traditional market dynamics. Artificial intelligence, automated trading bots, and sophisticated analytics tools are now readily available to both individual traders and existing organizations, and are also becoming more affordable than even a few months ago. Innovations like blockchain and protocols in decentralized finance (DeFi) can provide new opportunities that can bypass many traditional brokerages.

That said, with new opportunities come responsibilities, and it's the retail traders who will find success in this area when they can combine human choice, discretion, and emotional and psychological control with technological tools, risk management strategies, leverage trading, knowledge, and personal development.

Conclusion

Retail trader activity has come a long way from the time when financial markets were only accessible to wealthy and connected insiders. Today retail traders are part of the market ecosystem that includes many diverse participants that can be agile enough to see the opportunities in the financial landscape - sometimes with irrational exuberance.

They can move the market or the tick/tape on a stock, challenge traditional institutions on trade execution days, and initiate a financial event that could be documented in history and attract the global mainstream media's interest.

However, with the power came risks, and the fact retail trading does not identify those risks requires more than a smart phone and an idea.

Retail trading, provided individuals understand the risks, represents the upside of democratized finance for people. In this world, people can participate, but only those who are informed, disciplined, and adaptable are likely to profit.