Week 37. Retail Investing

Retail Investing and Trading: An Introduction to the Markets Behind the Headlines

For many, the financial markets appear opaque, intimidating, and reserved for “experts.” Headlines warn of crashes, scandals, and catastrophic losses, while social media simultaneously promotes overnight success stories. Somewhere between fear and fantasy sits the reality of retail investing and trading, a space that is more accessible than ever, yet widely misunderstood.

At its most basic level, retail investing refers to individuals buying and holding financial instruments, such as shares, bonds, exchange-traded funds (ETFs), or commodities, typically with a longer-term outlook. Retail trading, by contrast, often involves shorter time horizons, higher frequency transactions, and, in many cases, leverage. Both take place within the same global financial markets, but the risks, behaviours, and outcomes can differ significantly.

What is striking is not merely that individuals participate in these markets, but how easily they can now do so. With a smartphone, an internet connection, and minimal capital, a person can open an account and begin trading within minutes. Yet accessibility does not equate to understanding, and this disconnect lies at the heart of many problems in the retail trading space

The financial markets are primarily shaped by institutional actors, including:

• Investment banks

• Hedge funds

• Pension funds

• Asset managers

• Insurance companies

• Sovereign wealth funds

These institutions operate with vast capital, professional analysts, legal teams, proprietary data, and sophisticated risk management frameworks. Retail traders, by comparison, operate individually, often without formal education, limited capital, and little appreciation of market microstructure.

Financial literacy is not embedded in mainstream state education in the UK. Concepts such as compound interest, risk management, behavioural bias, or market structure are rarely taught in schools. By contrast, elite educational pathways often include exposure to economics, finance, and investment theory from an early age.

This absence leaves many adults learning about markets through media narratives, which tend to oscillate between panic and hype. Market downturns are framed as disasters; rallies as once-in-a-lifetime opportunities. Without foundational knowledge, individuals either fear participation altogether or enter the markets under dangerously unrealistic expectations.

From a legal perspective, this raises a critical issue: informed consent. While financial services regulation in the UK emphasises disclosure and risk warnings, disclosure alone does not guarantee comprehension. The law assumes a degree of rational, informed decision-making that may not reflect the lived reality of many retail participants.

Why Do So Many Retail Traders Lose?

Empirical research consistently demonstrates that the majority of retail traders lose money. A 2024 academic study by Memon, Rajput, and Vidani found that approximately 90% of stock market traders operate at a loss. (Memon, et al, 2024)

Possible factors in this outcome could include, but are not limited to:

• Overconfidence and emotional decision-making

• Misunderstanding probability and risk

• Reliance on unverified “signals” or influencers

• Excessive leverage

• Inadequate capitalisation

From a regulatory standpoint, this creates a tension. On one hand, adults are free to take financial risks. On the other, regulators such as the Financial Conduct Authority (FCA) are tasked with ensuring markets function with integrity and that consumers are not misled or exploited.

Retail trading sits at the intersection of personal responsibility and regulatory oversight. The law does not, and arguably should not, prevent individuals from participating in markets. However, it does impose duties on firms regarding marketing, disclosures, suitability, and fair treatment of customers.

Where the debate becomes contentious is around education and expectation-setting. If the overwhelming majority of participants lose money, the question is not merely whether trading is lawful, but how it is being framed, sold, and understood.

This is particularly relevant in the age of “finfluencers,” where informal, often unregulated content shapes behaviour more powerfully than statutory risk warnings. The gap between legal compliance and practical consumer understanding remains one of the most pressing challenges in modern financial regulation.

A Closing Reflection

Retail investing and trading are not inherently reckless pursuits. They can be legitimate tools for wealth-building, learning, and participation in the global economy. However, without education, context, and realistic expectations, they become fertile ground for loss and disillusionment.

For me, understanding why so many retail traders lose is not about discouraging participation, it is about improving outcomes. That requires better education, clearer regulation, and a more honest conversation about risk, probability, and power within financial markets.

This blog marks the beginning of that conversation.

References

Memon, G., Rajput, S. and Vidani, J. (2024) Why 90% of Stock Market Traders are in Loss, SSRN Electronic Journal, 6(1), pp. 41–49. Available at: https://www.researchgate.net/publication/380733162_Why_90_of_Stock_Market_Traders_are_in_Loss