Why Retail Investors Are More Important Than Ever

It wasn't so long ago that investing was entirely dominated by large financial companies and Wall Street banks. Especially for those companies looking to go public or already on the market, investing was motivated by institutional investors such as pension and mutual funds, hedge funds, insurance companies, commercial banks and trusts.

While most investing still runs through institutional investors, individual investors are a sizeable segment of the market. Often called retail investors, understanding these individuals and what makes them tick is now more critical than ever.

As you consider how your own company fits in the market, this change is something to think about, especially if you're looking to go public or are trading publicly already.

What is a retail investor?

Unlike institutional investors, those big-name companies in the financial industry, retail investors are those who manage their own money. If you've ever bought a stock, saved for retirement or contributed to a 529 plan for your kid's college education on your own, then you're a retail investor.

Today, the financial technology industry's growth has enabled individuals to make investment decisions independently, without the need for a broker or an employer-sponsored retirement account. Many smaller investment companies, apps and websites can have you ready to start investing in just a few days.

How retail versus institutional investors make decisions

The majority of retail investors aren't financial professionals. Because of that, they often react differently to small market fluctuations and news about a company.

For example, a press release announcing third-quarter earnings below expected levels might not cause much, if any, concern for an institutional investor that has a particular strategy. However, some retail investors could see that news and start selling off, which might have adverse ripple effects across the market.

Retail and institutional investors also differ in how they get information about a company. Many institutional investors have entire divisions of analysts who carefully read all Securities and Exchange Commission filings for every company on the market.

Most individuals don't go into that level of detail when investing. They often make their investment decisions based on their friends' or families' opinions, a few trusted websites, trading forums and message boards.

Age and portfolio size are often factors, too. Retail investors often make decisions based on their age, influencing how much risk they're willing to take on and their investment goals. They also usually have much smaller portfolios and more of a personal stake in their investments compared to institutional investors, which might have millions of assets under management.

How to approach retail investors

Keep in mind that retail investors aren't a monolith. Just as with institutional investors, some are primarily focused on making long-term investments for retirement, while others are actively trading to try to make daily gains.

The growth of retail investors likely won't slow anytime soon. That means companies need to adjust how they approach this segment of the market, especially when it often doesn't react in ways institutional investors do. So while there's no one-size-fits-all approach, you can use some strategies now.

For example, many individuals get their investment information from popular sites and forums where retail investors are chatting. You don't need to become an active member in these forums, but understanding the topics and news that drive buying and sell-offs can help determine what information reaches these investors.

Another strategy is to use more touch points to engage potential investors. Some companies find it worthwhile to keep retail investors in mind when sending out marketing materials, including prospectuses and shareholder voting forms. You might also consider adding a small team that only deals with individual investors. Part of that strategy could be building better relationships with online trading platforms.

Prepare now

While institutional investors make up most of the market, the trend toward retail investors isn't going anywhere. Developing a strategy now around approaching these investors can pay off over the long term as they continue to become a significant part of the market.