Who are Retail investors?

Retail investors can be divided into tow categories namely, a beneficial shareholder and a registered shareholder.

Retail or small investors are individuals who buy and sell shares for their personal use and not for another company or organization. They also buy stocks in much smaller quantities compared to institutional investors. Some investment vehicles such as securities and derivatives require minimum investments for dissuading retail investors from dabbling in them. However, it remains a matter of debate that most retail investors are averse to taking risks and poorly informed compared to other investors.

What are the categories of Retail Investors?

Retail investors can be divided under two categories of share ownership.

A beneficial shareholder

A beneficial shareholder is a retail investor who places shares of their securities in a bank's account or in the account of a stockbroker. The broker holds the securities on behalf of the underlying shareholder.

A registered shareholder

A Registered Shareholder is a small investor who holds shares directly through the issuer or its transfer agent. Many such shareholders possess copies of their stock certificates.

Furthermore, retail investors can also avail of the advices offered by financial services firms to a large extent while making their investment decisions.

Odd-lot theory

Retail investors who deal in fewer than 100 shares at a time are termed as odd-lotters in technical analysis. Such investors are thought to be both badly informed and averse to taking risks. It is hence believed that a significant investor could profit if he did just the opposite of what the odd-lotters were doing. For instance, if a technical analyst observes that a huge number of odd-lotters were selling a particular security, he could take this as a cue to buy more of that security.

The theory was quite prominent in the 1960s and 1970s, but fell out of favor due to lack of evidence that the investments of odd-lotters underperformed in the market in general. The growth in popularity of mutual funds among retail investors during the 1990s made the odd-lot theory redundant.

Source:- IIFL
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