The risks and rewards for today’s retail trader

If you’re a retail trader, you now have better access than ever to investments. But it’s important to understand the risks and rewards in order to succeed.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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It’s a wild world out there right now if you’re a retail trader or investor. On the one hand, it’s easier and cheaper than ever before to invest. On the other, new investors are reshaping financial markets.

This empowerment comes with a lot of potential reward but there are also many risks. It’s important to understand both sides in this new chapter to make sure that you don’t get left holding the bag or hung out to dry.

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The retail trader movement

There are now plenty of different cheap share dealing platforms for investors to choose from. This has made investing more accessible and affordable to lots more people.

You’d think that novice investors would perform poorly, but that’s not the case. Last year, the average retail investor was actually more profitable than most hedge funds.

However, all this good news was somewhat overshadowed by the GameStop drama. These events caused a bit of a rift between retail investors and some brokers.

Michael Kamerman, CEO of trading platform Skilling, explains: “The GME saga saw retail traders and investors take on Wall Street – and the retail crowd won. The power of collective action was showcased more than ever.

“No matter your opinion on the matter, it became very clear that investor education on numerous topics needed improvement. As someone with industry experience, I understood the plight of Robinhood by limiting the positions of its customers.

“Too many customers stockpiling into trades all in one direction can be very dangerous to the brokerage and its traders. Robinhood and its customers struggled to find common ground on that topic and it left a black eye on the brokerage as a result.”

Rewards for the retail trader

Questions have been asked about who’s side platforms like Robinhood are on. In truth, many brokers just weren’t expecting the massive demand focusing around a handful of shares.

All this new access to markets at an affordable price can lead to some really positive results if you act smartly. Professional investors might have an edge when it comes to resources and general market power, but we have our own advantages:

  • Using first-hand experiences to invest in what you know is a useful investing tip. You will see things in your daily life that professional investors won’t.
  • Technology and investing apps mean that you can trade easily and quickly without much delay or red tape. You no longer have to ring up a broker and wait for them to place your trade.
  • The internet can provide so much free information about companies and shares that previously would have been hard to get hold of.
  • Many professional traders have an expectation to make fast gains because they’re investing with other people’s money. We have the luxury of being able to invest for the long term, without the pressure of constantly having to achieve quick growth.

Risks for the retail trader

Although there are many ways we can benefit from this movement of ordinary investors, there are also some keys risks to watch out for:

  • Getting swept up in the social media hype and taking investing tips from people on platforms like TikTok is a recipe for disaster.
  • Make sure you keep within the rules and be careful to avoid things like market abuse.
  • You can invest with the click of a button, but it’s important to be patient and not make rash decisions.
  • Investing isn’t a game of us versus them. Your goal is to try and make money; don’t lose sight of that.
  • Exercising caution and being risk-averse can be helpful, but don’t put on a tinfoil hat and believe that people in the financial world are out to crush you. There is enough room for everyone to be winners.

Takeaway

Remember that with great power comes great responsibility. Investing as a retail trader is more accessible than ever. Use this access to your advantage by investing wisely. Don’t squander your opportunity to achieve financial freedom by getting caught up in investing drama or trying to get one over on the professionals.

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