Introduction
Two major groups that actively participate in investment activities are institutional and retail investors. These two categories differ in numerous aspects, including the scale of investment, access to information, and investment strategies. By understanding these differences, as well as knowing their own strengths and weaknesses, individuals and companies can make better-informed investment decisions.
For example, an institutional investor should acknowledge its strengths when gathering and allocating resources during its investment process. Similarly, a retail investor should understand their risks, limitations and also opportunities when making decisions in their own investment journey.
Institutional Investors
These are organisations that trade securities in large volumes. They are typically entities that manage money on behalf of other investors. Examples of institutional investors include pension funds, mutual funds, insurance companies, endowments, and hedge funds.
The following are some of the advantages that institutional investors often enjoy over their retail counterparts:
- Since institutional investors are organisations with multiple people in them, they can afford to delve into more detailed research as well as complex investment strategies. Therefore, it also means that they are more likely to succeed in assessing the market.
- Institutions enjoy lower transaction costs due to economies of scale.
- Institutional investors tend to be more capable of influencing market prices and trends. This is due to the sheer size of their usual investments as well as the resources available to them.
Retail Investors
In contrast to institutional investors, retail investors are individuals who buy and sell securities for their personal accounts. They invest much smaller amounts and are often guided by different motives, such as saving for retirement or achieving personal financial goals.
Retail investors manage their own money. They do not have to answer to any other investors for their performance. After paying taxes, the profits and losses are entirely the investor’s own. In turn, retail investors have to take on more responsibilities at an individual level.
They may use brokerage accounts, retirement accounts or other investment vehicles for trading. They may use both full-service or discount brokers for their investments.
Retail investors usually face higher transaction costs compared to institutional investors. They also have less access to information and may find it more difficult to conduct thorough analysis due to limited resources. Additionally, the relatively smaller size of their trades means they have minimal influence over market prices.
However, in the last few years, increased financial awareness and the opening of Demat accounts have allowed more retail investors to participate in the Indian stock and bond markets. Having a more informed group of retail investors ensures that a large chunk of capital is directed toward companies that are more likely to succeed.
Difference Between Institutional Investors and Retail Investors
| Topic | Institutional Investors | Retail Investors |
| Scale of Investment | Institutional investors trade in large volumes, often involving crores of rupees. | Retail investors typically invest thousands or lakhs of rupees. |
| Typical purchases | They tend to buy shares in block trades, i.e. 10,000 shares at a time. | They are more likely to buy shares in round lots i.e. 100 shares at a time. |
| Access to Information | Institutional investors often have access to more in-depth, timely, and exclusive information compared to retail investors. They may have dedicated research teams and subscribe to expensive data services. | Retail investors often do not even have enough time to invest with adequate research done on a daily basis. Therefore, the methods they choose for making investment decisions are also different. |
| Influence on the Market | Institutional investors, due to their large trade volumes, have the potential to move the markets in a certain direction. | Retail investors, with their smaller trade volumes, usually do not have much influence. |
| Risk Management and Diversification | Institutional investors often employ sophisticated risk management strategies and have the resources to create more diversified portfolios. | Retail investors might find it more challenging to achieve a high level of diversification. |
| Emotional Trading | Institutional investors are more educated and experienced in the field of finance. They also employ algo-trading to make decisions unaffected by human emotions. | Retail traders are usually less experienced in handling such risky business. Therefore, they often give in to their emotions while investing. |
DIIs vs FIIs
Institutional investors are further divided into two groups:
- Domestic Institutional Investors (DII) and
- Foreign Institutional Investors (FII)
FIIs include sovereign wealth funds, foreign mutual funds, multilateral organisations and other financial institutions.
Both FIIs and DIIs have certain characteristics that make them different from the other:
- During economic slowdown, foreign institutional investors with short-term investments simply leave the country for other economies where the returns are higher. However, DIIs are less likely to do it as they have long-term investments.
- FIIs have certain restrictions in terms of the percentage of a domestic company they can own. DIIs have no such upper limits.
The impact that both DIIs and FIIs have on the Indian economy is huge. Both own a large number of shares in the Indian stock market. Ups and downs in the level of investment by both groups seriously affect the share prices in the Indian stock market. Increased investment by both DIIs and FIIs is needed for providing fresh capital to the Indian industries and the stock prices and indices in India to keep soaring.
Final Words
Understanding the differences between institutional and retail investors is essential for anyone looking to engage in the financial markets. Both types of investors play a vital role in the functioning and development of financial markets.
If you are interested in investing in the Indian capital markets, open a Demat account with Angel One today!
FAQs
Institutional investment show that the company is good enough to invest in, as per organisations who have a large pool of analysts to assess the same. It increases the credibility of the company’s stock in the eyes of the retail investors.
Institutional investors generally invest more via equity investments when the rates of interest are low. This is because, then they have cheaper access to capital and the economy is also going through an expansion. Other factors such as regulations and emerging market status also affect institutional investment in the economy.
The decision to invest in a company’s stock should be based on a more holistic view of its financials and sector-based analysis. There is no such rule that companies with more FII investment are more likely to give better returns.
Yes, FIIs and their sub-accounts have to be registered with the Securities and Exchange Board of India under the SEBI Act, 1992. Once registered, they can invest in both equity and debt in India.
As a seasoned financial expert with a comprehensive understanding of institutional and retail investment landscapes, I'll dive into the intricacies discussed in the provided article.
Institutional Investors:
-
Scale of Investment:
- Institutional investors engage in substantial transactions, often involving crores of rupees.
- They execute large-volume trades, such as purchasing 10,000 shares at a time.
-
Typical Purchases:
- Prefer block trades, buying shares in significant quantities.
-
Access to Information:
- Enjoy access to more in-depth, timely, and exclusive information.
- Maintain dedicated research teams and subscribe to expensive data services.
-
Influence on the Market:
- Due to large trade volumes, they can significantly impact market prices and trends.
-
Risk Management and Diversification:
- Employ sophisticated risk management strategies and can create more diversified portfolios.
-
Emotional Trading:
- Tend to be more educated, experienced, and may use algo-trading to minimize emotional influences.
Retail Investors:
-
Scale of Investment:
- Retail investors typically invest smaller amounts, ranging from thousands to lakhs of rupees.
- Engage in smaller trades, buying shares in round lots (e.g., 100 shares at a time).
-
Access to Information:
- Often have limited access to information and may find it challenging to conduct thorough analysis.
-
Influence on the Market:
- Due to smaller trade volumes, they generally have minimal influence on market prices.
-
Risk Management and Diversification:
- May find it more challenging to achieve a high level of diversification.
-
Emotional Trading:
- Less experienced and may succumb to emotional influences while investing.
DIIs vs FIIs:
-
Economic Impact:
- Foreign Institutional Investors (FIIs) include sovereign wealth funds, foreign mutual funds, and multilateral organizations.
- Domestic Institutional Investors (DIIs) are less likely to leave during economic slowdowns due to long-term investments.
-
Ownership Restrictions:
- FIIs have restrictions on the percentage of a domestic company they can own, while DIIs have no such upper limits.
-
Market Impact:
- Both DIIs and FIIs significantly impact the Indian economy, owning a large number of shares in the stock market.
Final Words:
Understanding the distinctions between institutional and retail investors is crucial for effective engagement in financial markets. Both play pivotal roles in market functioning and development. The article emphasizes the importance of recognizing these differences to make well-informed investment decisions.
For those interested in investing in the Indian capital markets, the article suggests opening a Demat account with Angel One.
FAQs:
-
Importance of Institutional Investments:
- Institutional investments indicate a company's credibility and can boost stock credibility in the eyes of retail investors.
-
Conditions for Institutional Investment Increase:
- Institutional investors often increase equity investments when interest rates are low and during economic expansions.
-
Choosing Between FII and DII Investment:
- Investment decisions should be based on holistic financial and sector-based analyses, not solely on the type of investor.
-
SEBI Registration for FIIs:
- Yes, FIIs and their sub-accounts must be registered with SEBI before investing in India. Once registered, they can invest in both equity and debt.
