Institutional vs. Retail Investors: An Overview

Aug 30, 2022 By Triston Martin

Investments attract different types of investors with different motives. The two main kinds that investors invest in our institutional and retail. An institutional investor can be described as a business or organization with employees who make investments on behalf of other entities (typically other companies and organizations). Institutions allocate funds to be invested based on the company's objectives or the organizations they represent. Some of the most well-known institutional investors are pension funds, banks hedge funds, mutual funds, endowments, and insurance companies.

However, retail investors invest their own funds, usually for personal benefit. The main distinctions between institution-based investors and retail investors are the frequency that each trade is conducted, the amount of money and investments that are involved in their transactions as well as the fees each has to pay to invest in their knowledge of investing and experience, as well as the access they each have to significant research on investment.

Institutional Investors

Institutional investors are the biggest people on the block - the elephants who have a huge amount of money to carry around. They include mutual funds, pension fund money managers, hedge funds, insurance companies, commercial trusts, investment banks, and private equity investors. Institutional investors comprise more than 85 percent of the New York Stock Exchange trade volume.

They are the ones who move huge blocks of shares and exert a huge influence on stock market movement. They are considered to be sophisticated investors that are educated and are therefore more likely to make rash decisions and investment decisions. In turn, institutional investors are exposed to less of the protection rules provided by the Securities and Exchange Commission (SEC) offers to the everyday individual investor.

The money institutions invest in isn't, in fact, money that the institutions own. Institutional investors typically invest in different organizations, companies, or individuals. If you are a member of an employer-sponsored pension plan or own parts of an investment fund or have to pay for any policy, you're benefitting from the knowledge of the institutional investors.

Due to their size and the volume and size of their investment portfolios, institutional investors are usually able to negotiate better fees for their investments. Additionally, they can access the kinds of investments that ordinary investors cannot access, like investment opportunities with huge minimum buy-ins.

Retail Investors

Non-professional, or retail, investors are people who have no professionalism. Retail investors often purchase and sell equity, debt, and other investments through brokers, banks, and mutual funds. A retail investor invests only for their profit and not for the benefit of other investors. They control their own money. Generally, when they invest in the long-term or trade their accounts, they make investments significantly less often than institutions. Retail investors are typically driven by personal life-event objectives, like setting aside money for retirement plans, saving for children's education, purchasing the home of their dreams, or financing a big purchase.

Due to their lower purchasing ability, retail investors usually are required to pay more commissions and other charges on their trading in addition to commissions, marketing, and other related fees on investment. The SEC is charged with protecting investors from retail and ensuring markets operate in a controlled manner believing that retail investors are less knowledgeable and may be uninformed. In this way, they are protected and prohibited from investing in complicated, risky investments.

Although they have more access than ever to accurate information on financials, investment education, and advanced trading platforms, investors who are not retail are susceptible to behavior-based biases. They might fail to know how an entire group of investors could affect the market.

Key Differences

Trading Patterns

Institutional investors make more trades than retail buyers (think five shares sold versus five thousand shares traded through one deal). While institutional investors have the greater purchasing capacity to buy the most sought-after assets, the volume of their transactions may drastically impact market dynamics and prices. However, even though consumers are susceptible to volatile or emotional trading, years of experience and analysis guide the activities of institutional investors in the market.

Access to Resources

Another reason institutional investors influence the markets comes through the cash it receives from businesses and individuals for whom it invests. By trading billions in dollars instead of hundreds of thousands, institutional investors are charged lower to trade and can invest in riskier funds with strict investment requirements. Although you may not consider information an asset, it's a source intended for institutional investors. Information updated each nanosecond is crucial to institutional investors to effectively and profitably on the market.

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