Prior to the pandemic, stock market analysts noted that only 2 of 5 millennials invested their savings in the stock market using online brokerage platforms. They came to be known as retail investors, as a distinction from the institutional investors. The latter is usually an investment firm that hires employees to broker investments in behalf of clients.
In 2020 when millions of millennials became unemployed, many turned to online brokerage platforms as potential sources of income. In the US alone, studies revealed that an estimated 10 million individuals became new retail investors. Apparently, retail investing produced positive results, which were attributed to app-supported, online brokerage platforms. The web-based technology enabled newbie investors to start small, when honing their skills in investing.
How Does Retail Investing Work
The most popular stock trading apps are those that provide trading leads and features that allow tracking stock performance and price index in real time. All of which made it easier for retail investors to decide whether to buy, hold or sell their personal equity investments.
Although trading on their own, retail investors participate in online forums to gather feedback about investing trends. Mainly because unlike institutional investors, retail investors trade a lot by constantly following investing trends in equity markets. Reports have it that during peak days, about a quarter of the trading volume involve retail investors.
While majority of rhis new breed of investors are millennials who are new at investing, they are using online stock trading platforms designed to make the equities market accessible to everyone.
Benefits and Drawbacks of Retail Investing
As in any financial undertaking, it’s always best to consider the benefits and drawbacks before deciding if the suggested program or action is right for you.
First off, there is little paper work involved in retail investing. The only paper work you have to accomplish are the tax returns. Investment income on equity holdings require payment of capital gains tax of 0%, 15%or to 20%; depending under which tax bracket the investment income falls. .
The good thing about retail investing using online platforms is that investing options are not limited to penny stocks. Some online brokerage platforms allow retail investors to buy fractional shares on high-priced corporate stocks. Some others offer trading on alternative markets like cryptocurrencies and non-fungible tokens (NFTs).
Trading by way of online platforms does not require retail investors to maintain at least $25,000 in their account, In retail investing the company running the online brokerage platform are the primary market investors.
Platform users simply pay fees that will give them access to the online technology. The amount depends on whether the user opts for the basic functions and services, or to pay additional for the more advanced features of the platform.
Stock and bond investments are easy to liquidate or convert into cash by simply selling them at the current stock market price. Institutional investors impose tougher conditions and restrictions on investors looking to liquidate their equity holdings prior to the agreed period.
Drawbacks of Retail Investing
While being a retail investor permits non-professional traders to invest in small amounts, it also means the returns are also small.
Retail investors cannot use the fees paid to onllne platforms as direct deductions on investment income the way institutional investors do. Investors who pay commissions to traditional brokers, can write off the amount as the non-taxable portion of an investment income. The IRS will collect the related tax from the investment firm that collected the commission.
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