Retail Investors vs. Institutional Investors: Differences Explained

In the world of investing, retail investors and institutional investors play distinct roles in the financial markets. Retail investors are individual investors who trade and invest in financial markets with their personal funds. On the other hand, institutional investors are large entities such as mutual funds, pension funds, insurance companies, and hedge funds that manage and invest large sums of money on behalf of their clients or members.

While retail investors and institutional investors both aim to generate returns on their investments, they have different investment strategies, risk tolerance levels, and market influences. Understanding the differences between these two types of investors can help individuals make informed investment decisions and navigate the complexities of the financial markets.

Let's understand the key difference between retail investors vs. institutional investors in detail.

What is a Retail Investor?

Retail investors are non-professional individuals making private investments with their own money. Like retail consumers, retail investors may buy or sell small positions in stock. Retail investors may use brokerage or retirement accounts as investment vehicles. Some retail investors will use a financial adviser or investment adviser, while others invest themselves.

Gaining knowledge and understanding of markets is essential for retail investors, but the depth of knowledge and level of expertise varies widely among retail investors. Retail investors may also choose various investment strategies according to their preferences, risk tolerance and financial goals.

What is an Institutional Investor?

Institutional investors don’t use their own money. Instead, they invest money on behalf of others. Examples of institutional investors include hedge funds, mutual funds, pension funds, university endowments, insurance companies and sovereign wealth funds. Institutional investors can also include commercial banks, credit unions, central banks and government-linked companies.

Generally, institutional investors have greater in-depth knowledge than the average retail investor. They also move significantly more investment funds and can have a bigger impact on market trends. When institutional investors buy or sell a large position, they can create sudden price moves or imbalances in supply and demand.

Institutional investors buy, sell and manage portfolios that may include stocks, bonds, investment securities and other investment positions. Institutional investors often have fewer protective regulations because it is assumed these entities are more knowledgeable and better able to protect themselves.

According to data from Pensions & Investment Online, institutional investors account for about 80% of the S&P 500 total market capitalization. As an example of retail vs. institutional investors' crypto investment, a retail investor would purchase a portion of individual cryptocurrencies, while institutional investors can purchase much larger positions that can even affect market movements.

Comparing Retail Investors and Institutional Investors

How do retail vs. institutional investors function? Here's a full breakdown of how the two compare.

General Characteristics

• Retail investors: These are individual investors who invest their personal funds in the financial markets. They typically have smaller investment portfolios and fewer resources compared to institutional investors. Retail investors often buy stocks in round lots of 100 shares.
• Institutional investors: These are organizations that pool together large amounts of money from various sources (e.g., pension funds, insurance companies, mutual funds) to invest on behalf of their clients or stakeholders. Institutional investors often have substantial resources, professional expertise and access to sophisticated investment strategies. Institutional investors often buy and sell block trades of stocks in 10,000 shares or more.

Motivations

• Retail investors: They invest for personal financial goals, such as saving for retirement, purchasing a home or funding education. They may also have a desire to grow their wealth or generate income.
• Institutional investors: Their primary goal is to generate returns on the investments they manage for their clients or stakeholders. Institutional investors often manage large sums of money and aim to achieve long-term growth or income targets.

Investment Strategies

• Retail investors: They typically engage in more individual stock picking, invest in mutual funds or exchange-traded funds (ETFs) and may also participate in initial public offerings (IPOs) and crowdfunding platforms. Retail investors may be more prone to emotional decision-making and short-term trading.
• Institutional investors: They employ various investment strategies, including diversification, asset allocation and active management. Institutional investors have access to research teams and sophisticated analytics and may engage in complex trading strategies. They often focus on long-term investment horizons and seek to maximize risk-adjusted returns.

Impact on the Market

Retail vs. institutional investors' market share also varies significantly. Institutional investors buying and selling large volumes that can impact market dynamics and create supply or demand imbalances.

• Retail investors: While each retail investor's impact may be small individually, collective actions by retail investors can create significant market movements, as seen in phenomena like "retail investor frenzy" or "crowd trading." Social media platforms and online communities have played a role in amplifying their influence.
• Institutional investors: Because of their substantial financial resources, institutional investors can significantly impact the market. Large-scale buying or selling by institutional investors can drive stock prices, influence market trends, and impact corporate governance through shareholder activism.

Resources and Expertise

• Retail investors: Although they generally rely on their own research or seek advice from financial advisers, retail investors have access to more resources than ever before. Some retail investors attempt to follow institutional investors. However, this practice also has risks.
• Institutional investors: With greater access to resources and professional expertise than retail investors, institutions often employ teams of investment professionals, including analysts, portfolio managers and researchers with specialized financial market knowledge and experience.

Risk Tolerance

• Retail investors: These investors may have a wider range of risk tolerance levels, with some preferring more conservative investment approaches while others are willing to take higher risks for potentially higher returns.
• Institutional investors: In managing funds on behalf of others, institutional investors often have defined risk tolerance parameters and follow established risk management strategies.

Retail Investors vs. Institutional Investors for Wealth Building

As a retail investor, you can take advantage of retail and institutional investment opportunities to build wealth. Consider investing in mutual funds, hedge funds or real estate investment trusts (REITs) while also building your own risk-appropriate diverse investment portfolio.

Frequently Asked Questions