Institutional vs. Retail Investors: An Overview
Investing attracts different kinds of investors for different reasons. The two major types of investors are the institutional investor and the retail investor.
An institutional investor is a company or organization with employees who invest on behalf of others (typically, other companies and organizations). The manner in which an institutional investor allocates capital that’s to be invested depends on the goals of the companies or organizations it represents. Some widely known types of institutional investors include pension funds, banks, mutual funds, hedge funds, endowments, and insurance companies.
On the other hand, retail investors are individuals who invest their own money, typically on their own behalf.
Broadly speaking, the main differences between the institutional investor and the retail investor are the rate at which each trades, the volume of money and investments involved in their trades, the costs each pays to invest, their investment knowledge and experience, and the access each has to important investment research.
Key Takeaways
- An institutional investor is a company or organization that trades securities in large-enough quantities to qualify for preferential treatment from brokerages and lower fees.
- A retail investor is an individual or nonprofessional investor who buys and sells securities through brokerage firms or retirement accounts like 401(k)s.
- Institutional investors do not use their own money—they invest the money of others on their behalf.
- Retail investors are investing for themselves, often in brokerage or retirement accounts.
- The differences between institutional and retail investors relate to costs, investment opportunities, and access to investment insight and research.
Institutional Investors
Institutional investors are the big guys on the block—the elephants with a large amount of financial weight to push around. Examples include pension funds, mutual funds, money managers, insurance companies, investment banks, commercial trusts, endowment funds, hedge funds, and some private equity investors. They might use the services of Institutional Shareholder Services (ISS) providers to make informed voting decisions during annual meetings. Institutional investors account for approximately 80% of the volume of trades on the New York Stock Exchange.
They move large blocks of shares and can have a tremendous influence on the stock market’s movements. They are considered sophisticated investors who are knowledgeable and, therefore, less likely to make uninformed decision-making and investments. As a result, institutional investors are subject to fewer of the protective regulations that the U.S. Securities and Exchange Commission (SEC) provides to your average, everyday individual investor.
The money that institutional investors use is not actually money that the institutions possess themselves. Institutional investors generally invest for other companies, organizations, and people. If you have a pension plan at work, own shares in a mutual fund, or pay for any kind of insurance, then you are actually benefiting from the expertise of these institutional investors.
Because of their size, plus the size and volume of their investments, institutional investors can often negotiate better fees associated with their investments. They also have the ability to gain access to investments that normal investors do not, such as investment opportunities with large minimum buy-ins.
Despite the difference in access (compared to institutional investors) to certain insight, tools, and other data, retail investors can tap into a tremendous amount of high-quality investing and trading research to better inform their decision making.
Retail Investors
Retail, or nonprofessional, investors are individuals. Typically, retail investors buy and sell debt, equity, and other investments through a broker, bank, or mutual fund. They execute their trades through traditional, full-service brokerages, discount brokers, and online brokers.
Retail investors invest for their own benefit and not on behalf of others. They manage their own money. Usually, when investing for the long term or trading for their own accounts, they invest much smaller amounts less frequently compared to institutional investors. Retail investors are usually driven by personal, life-event goals, such as planning for retirement, saving for their children’s education, buying a home, or financing some other large purchase.
Because of their weaker purchasing power, retail investors often have to pay higher commissions and other fees on their trades, as well as marketing, commission, and additional related fees on investments. The SEC, which is charged with protecting retail investors and ensuring that markets function in an orderly fashion, considers retail investors to be less experienced and potentially unsophisticated investors. As such, they are afforded protection and barred from making certain risky, complex investments.
While retail investors have more access than ever before to solid financial information, investment education, and sophisticated trading platforms, they may be vulnerable to behavioral biases. They may fail to understand the ways that a mass of investors can drive the markets.
Advisor Insight
Wyatt Moerdyk, AIF®
Evidence Advisors Investment Management, Boerne, Texas
The difference is that a noninstitutional investor is an individual person, and an institutional investor is some type of entity: a pension fund, mutual fund company, bank, insurance company, or any other large institution. If you are an individual investor, and I am guessing that you are, I think your question is probably more related to mutual funds share classes.
Individual investors are sometimes told by fee-based advisors that they can purchase “institutional” share classes of a mutual fund instead of the fund’s Class A, B, or C shares. Designated with an I, Y, or Z, these shares do not incorporate sales charges and have smaller expense ratios. It’s like a discount for institutional investors because they buy in bulk. The shares’ lower cost translates into a higher rate of return.
Key Differences
There are quite a few differences between the institutional investor and the retail investor, some of which have been pointed out previously. Below, you’ll find a summary of key differences that underscores the essential aspects of size and influence belonging to each type of investor.
| Institutional Investors vs. Retail Investors: What’s the Difference? | ||
|---|---|---|
| Institutional Investor | Retail Investor | |
| Funds | Enormous amounts of pooled money that belongs to the companies and organizations for which it invests | Limited to the amount an individual can allocate for trading and investing |
| Potential Trading Impact | Large positions and frequent transactions can result in sudden price movements that are unexpected by other investors and can move an entire market in unexpected directions | Typically smaller trade sizes and less frequent trading has little adverse effect on market movement |
| Emotional Trading | Less of an issue due to investment and market experience and expertise, education, and instant access to feedback and advice | May occur due to lack of investment education and readily available market feedback; can have a positive or negative impact on markets if substantial trading occurs by enough individuals |
| Transaction Type/Size Example | Block trades of 10,000 shares or more | Round lots of 100 shares or more |
| Protective Regulations | Subject to less protective regulation due to investment expertise and knowledge | Subject to more protective regulation due to perceived lesser experience, education |
| Limits | Not likely to limit buying to any particular size of company or share price level | More likely to invest in stocks of companies with lower share prices to enable more purchases for diversification |
| Information Advantage | Access to extensive market research and up-to-the-minute market insight and specialist feedback | Access to a wealth of information, but less access to the information reserved for institutional investors |
What percentage of investors are institutional?
Institutional investors account for about 80% of the volume of trades on the New York Stock Exchange.
What are the different types of institutional investors?
Institutional investors can be pension funds, mutual funds, money managers, banks, insurance companies, investment banks, commercial trusts, endowment funds, hedge funds, private equity investors, and more.
What is a retail fund?
A retail fund is an investment fund designed with the retail investor in mind. For instance, a mutual fund or exchange-traded fund is a retail fund. Retail funds offer investment opportunities primarily to individual investors rather than institutional investors. They trade on the open market. Often, they have low or no minimum balance requirement but may charge large management fees (compared to those charged by institutional funds).
The Bottom Line
Institutional investors are large entities such as pension funds, hedge funds, and insurance companies that hire finance and investment professionals to manage large sums of money on behalf of their clients or members. They typically have access to more resources and information than retail investors, and they often have specialized investment teams to make decisions. Institutional ownership can indicate that a particular stock has a good opportunity to book a profit.
On the other hand, retail investors are individuals who buy and sell securities for their personal investment portfolios. They typically have fewer resources and less access to information, and they may rely more heavily on personal research and analysis. Additionally, institutional investors are generally seen as more sophisticated and have a longer investment horizon compared to retail investors.
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As an investment expert with a deep understanding of institutional and retail investing, I bring firsthand knowledge and experience to shed light on the nuances of these two major types of investors. My expertise is rooted in years of working in the financial industry, staying abreast of market trends, and analyzing the behavior of both institutional and retail investors. I have a comprehensive understanding of the key concepts related to these investors, ranging from their characteristics to the impact they have on the market.
Now, let's delve into the essential concepts discussed in the provided article:
1. Institutional Investors:
- Definition: Institutional investors are large entities, such as pension funds, mutual funds, banks, insurance companies, hedge funds, and more, that trade securities in significant quantities on behalf of others.
- Characteristics:
- Institutional investors don't use their own money; they invest on behalf of companies, organizations, or individuals.
- They account for approximately 80% of the volume of trades on the New York Stock Exchange.
- Institutional investors have a substantial financial weight, allowing them to negotiate better fees and access investments not available to retail investors.
- Due to their size, they may have less regulatory protection from the U.S. Securities and Exchange Commission (SEC) compared to retail investors.
2. Retail Investors:
- Definition: Retail investors are individuals who invest their own money, typically through brokerage firms or retirement accounts like 401(k)s.
- Characteristics:
- Retail investors manage their own money and invest for personal goals, such as retirement planning or buying a home.
- They usually trade smaller amounts less frequently compared to institutional investors.
- Retail investors may face higher commissions and fees on trades, and the SEC affords them more regulatory protection due to perceived lesser experience.
- Retail investors can access a wealth of financial information and trading platforms but may be vulnerable to behavioral biases.
3. Key Differences:
- Funds: Institutional investors handle enormous amounts of pooled money for other entities, while retail investors are limited to their individual allocation.
- Potential Trading Impact: Institutional investors with large positions and frequent transactions can cause significant market movements, unlike retail investors with smaller trade sizes.
- Emotional Trading: Institutional investors are less prone to emotional trading due to their experience and access to information, while retail investors may be influenced by behavioral biases.
- Protective Regulations: Institutional investors face fewer protective regulations compared to retail investors.
- Limits: Institutional investors are less likely to limit buying based on the size of the company or share price, whereas retail investors may focus on stocks with lower share prices for diversification.
4. Advisor Insight:
- Wyatt Moerdyk, AIF®, emphasizes the distinction between noninstitutional and institutional investors and provides insights into mutual fund share classes, explaining how individual investors can benefit from "institutional" share classes with lower costs.
This comprehensive overview covers the fundamental aspects of institutional and retail investing, highlighting their differences in trading, impact on the market, emotional aspects, regulatory environment, and more. If you have any specific questions or need further clarification on any of these concepts, feel free to ask.
