Pressing the "buy" or "sell" button on an electronic trading account can be all that is required to engage in online trading of stocks. However, more experienced traders may decide to engage in more complex trades, such as establishing a limit price on a block trade that is then distributed among multiple brokers and traded over the course of several days. There are two primary categories of traders: retail and institutional. The distinctions can be attributed to the sort of trader they are. Retail traders, often known as individual traders, are those who purchase and sell stocks and other securities for their own personal accounts. Institutional traders are responsible for managing the buying and selling of securities for the accounts of an organisation. Institutional investors typically trade through exchange traded funds (ETFs), mutual fund investments, and pension funds, among other types of funds.
There were certain advantages that institutional traders used to have over regular investors, but most of those advantages have since disappeared. Real-time data, the capacity to trade in and receive more different securities, the ability to trade in and get more diversified securities, and the general availability of investment data and analysis have all contributed to a narrowing of the gap. Despite this, there is still a significant disparity between them. Institutions continue to have a number of advantageous positions, including access to a wider variety of assets (futures, IPOs and swaps), the power to negotiate trading costs, and the assurance of receiving the best pricing and execution.
Retail traders often put their money into bonds, options, stocks, and futures markets, but they have very limited or even no access to upcoming IPOs. Retail traders are allowed to trade any number of shares at once, however most transactions are conducted in lots. It is possible that the expenses of making trades will be greater for retail traders if they choose a broker who charges a flat fee per trade in addition to the costs of marketing and distribution. In most cases, the volume of shares transacted by retail traders is insufficient to have an effect on the price of the securities.
Retail traders, as opposed to institutional traders, are more likely to invest in small-cap stocks due to the lower price points that can be found in these stocks. This enables retail traders to purchase a diverse range of securities in an adequate number of shares, which is essential for building a diversified portfolio.
Forwards and swaps are two examples of financial instruments that are typically inaccessible to individual investors. However, institutional traders are able to invest in these instruments. Individual traders are generally dissuaded or prevented from participating because of the complicated nature and variety of deals. Additionally, institutional traders are frequently approached for investing in initial public offerings. Institutional traders are required to obtain the best price and execution, and they negotiate basis point costs for each transaction. They are not required to pay any expenditure ratios for marketing or distribution.
Institutional traders are able to have a significant impact on the share price of a securities due to the enormous volume they trade. Because of this, they may occasionally divide trades among numerous brokers or spread them out over a period of time in order to avoid making a substantial impact. The average market cap that institutional traders own typically increases in proportion to the size of the institution's fund. It is more difficult to put a large amount of cash to work in smaller-cap stocks because traders may not want to be majority owners or may decrease liquidity to the point where there may not be anyone to take the other side of the trade. This makes it more difficult to put a large amount of cash to work.
Retail traders and institutional traders are two distinct types of traders; nonetheless, it is common for retail traders to transition into the institutional trading arena. A retail trader might begin their career by trading for their own personal account. If they are successful in this endeavour, they might move on to trading for their friends and family. It is possible for a retail trader to organise into what is effectively a tiny investment fund if they continue to achieve excellent returns on their investments and acquire additional funds from other investors. This increase has the potential to continue indefinitely, reaching the point where retail traders become equivalent to institutional traders.
As a result of increased market understanding among investors, there has recently been a rise in retail participation in several parts of the derivatives market, such as options trading. The most recent findings demonstrate that this pattern is deteriorating in a number of significant ways. The results of retail brokerages for the final quarter of the preceding fiscal year reveal an interesting pattern in investment patterns. Retail trades in the F&O segment, which was hitherto dominated by institutional players, are gaining momentum. This is a space that was previously dominated by institutional players.
The number of "cash" share purchases, also known as stock bought for delivery (as opposed to being funded by margin funding), has decreased during the January-March 2022 quarter, although the volume of options and futures exchanged by retail investors has increased. As a consequence of this, retail leverage is larger at the current market levels, and the majority of it is concentrated in the top 200 stocks, as opposed to being concentrated in the smaller-cap end of the market as was typically the case in the past. It is likely that retail leverage is increasing, which always leads to more turbulence. This is especially true when events that were not foreseen or were regarded as having a minimal possibility of materialising really take place. Since there has been an increase in volume on the options trading side, there is a possibility that there has also been an increase in retail leverage.
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