Difference Between Retail & Institutional Investors
Equirus Wealth
24 Dec 2022 • 5 min read
Both Retail and institutional investors play many comparable roles. Apart from such similarities, there are a lot of differences between them. Understanding the distinctions helps you gain deeper knowledge about the investing world. Here we define the differences between the categories:
Who is an institutional investor?
Also called accredited investors, institutional investors trade securities on behalf of shareholders or private parties. They often have positions within institutions like insurance companies, banks, or endowments, giving them access to specialized information and thorough research.
Institutional investors engage in regular, high-volume trading, which offers brokers work with a stable flow of funds. As a result, brokers are motivated to charge institutional investors lower trading costs than they do ordinary traders (retail investors). Their investments are generally aligned with the goals of the organization. The types of institutional investors are determined by the type of investments they conduct. Here are the various types of institutional investors based on the investments that they generally indulge in
- Stockbrokers:
This type of institutional investor frequently utilizes large amounts of cash to buy enough shares to acquire the majority ownership of a firm. They are keen to hold a sizeable stake in the company. In order to maximize earnings and distribute a percentage of those profits to the company's shareholders which in turn will be routed to their own pockets. Given their sizeable ownership, the institutional investor can thereby influence the company's everyday activities.
- Mutual Funds:
These are organizations that pool funds from retail investors and invest them in shares, bonds, and other debt instruments over time as per the fund's mandate. These fund houses often deal with sizeable volumes and funds, hence are prominent domestic institutional investors.
Watch - Difference between Mutual Funds & ETFs (Exchange-Traded Funds)
- Hedge funds:
They collect capital from shareholders and reinvest it like mutual funds. The only difference is they are of higher risk profile. The regulatory authority is different, and the regulation is starkly different as compared to mutual funds. They are founded as limited partnership firms, they collect funds from targeted private investors, and professional fund managers manage the monies collected by employing different strategies across a range of risky and non-conventional assets.
- Pension and insurance:
Pension funds and insurance companies are also sizeable investors in the equity and debt markets. They play an integral part in domestic institutional investors. They generally park money with a long-term objective. Again, they could invest in equities, debt, and other investments.
- Banks:
Yet another form of institutional investor category is the banking institutions. They often invest a part of the funds which are not in circulation within their core activities of lending. They often function as institutional investors and actively invest in markets to optimize returns on their funds.
Who is a retail investor?
Individual investors commonly referred to as retail investors, invest their own funds, typically in their own names. They may perform their own study and have access to information on the retail industry. They are often low-volume, infrequent traders that invest for the long run. Due to their bouts of irrationality and relatively modest capital, brokerages have to charge more for each deal.
- Investors: Investors are those types of retailers who intend to stay in the game over the long haul. Typically, their investments are aligned with their goals. Also, they have a concrete financial plan backing their investments. Depending on whether they use the active or passive fund management technique, they may or may not indulge in tactical realignment. They, however, conduct strategic realignment to match their changing / evolving life goals.
- Speculators and traders: They are driven by short-term profits and often use arbitrage opportunities to make quick profits. Their investments are generally not aligned with long-term financial milestones. Tactical realignment is an absolute requirement for speculators and traders. They often scout for momentum in their stock trades or assets. They tend to ride the wave and often exit counters at the first sign of a turnaround.
Key differences between retail and institutional investors:
| Point of difference | Retail Investors | Institutional investors |
|---|---|---|
| Ownership | Invest their own money | Invest retailer or organization’s money |
| Research/information access | Own research with tools available publicly | In-depth research using sophisticated research tools |
| Trading frequency | Occasional traders | Frequent traders |
| Expertise | Need not have much expertise, can be a novice investor without an academic degree in finance | Is typically one who has a degree in finance. Needs ample expertise to handle funds efficiently |
| Volumes | Low volumes | High volumes |
| Fees | Higher fee | Lower fee |
Now that we know the difference between retail and institutional investors, we have gone one step deeper into the financial world. Despite the differences, the ultimate objective of all investors is to optimize returns at risk-adjusted levels.