Institutional Investor vs. Retail Investor: An Overview

Different types of investors gravitate to specific investment opportunities for a variety of reasons. Two of the most common types of investors are institutional investors and retail investors. The primary differences between these two are size and scale, but to really understand the differences and what makes each type of investor unique, it’s worth a deeper dive into the details. Here’s a breakdown, with all the basics plus specific attributes of each.

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Institutional Investors

Institutional investors refer to companies or organizations that invest money on behalf of clients, members, or shareholders. Some examples include insurance companies, mutual funds, hedge funds, endowments, commercial banks, and pensions, where they will buy and sell larger blocks of stocks, bonds, and other securities. It is due to this type of activity that institutional investors are often referred to as the “Whales of Wall Street.” 

Typically, institutional investors have a vast number of resources at their disposal and are often able to research a wider range of investment opportunities that aren’t open to other investors. Institutional investors can also influence sudden price adjustments in stocks, bonds, and other assets because of their ability to create supply and demand imbalances. In most cases, institutional investors are considered savvier and more sophisticated than the average retail investor and may be subject to fewer restrictive regulations in certain instances because of the perception that they are better able to protect themselves.

Retail Investors

Retail investors refer to individuals who invest their own money, which is usually done on their own behalf. Retail investors are also known as individual investors and are typically non-professionals who buy and sell securities or funds that include a range of securities like mutual funds and ETFs, or exchange-traded funds. A retail investor will typically do their trading through traditional brokerage firms or investment accounts or with online brokerages. The vast majority of the time, retail investors trade in much smaller amounts than institutional investors. It’s also normal for retail investors to pay higher fees and commissions due to this smaller trading volume.

Retail investors are more likely to invest in smaller companies because many institutional investors avoid these types of investments since buying large blocks can cause an imbalance in supply and demand. Typically, a retail investor will buy and sell trades in bond markets and equity markets in much smaller amounts than an institutional investor. It is possible for some wealthier retail investors to access alternative investment classes such as hedge funds and private equity funds.

How They Differ

When it comes to institutional investors vs. retail investors, the main differences that exist relate to the investment opportunities, the costs, and the access to research specific investments. Institutional investors also tend to trade at a much higher rate and are professionals with greater investment knowledge and experience. As an example of the difference in volume, it’s not uncommon for retail investors to buy and sell stocks in round lots of 100 shares or more, while institutional investors may buy and sell in block trades of 10,000 shares or more.

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