Retail Investors vs Institutional Investors

There’s no one-size-fits-all when it comes to the world of investing. Retail investors and institutional investors, while both interested in earning a return on invested money, are actually quite different in terms of how and what they invest in. 

Learn more about the differences in the types of investors and advantages to each, so you can move forward putting your money in powerful investments that offer the greatest return on your money.

What is a Retail Investor?

A retail investor can best be defined as an individual investor who puts money in securities for their own personal gain, rather than for an organization. Trades are typically much smaller than what would be seen from an institutional investor, who does not invest with their own money. 

Retail investing is done by “non-professional” investors. They buy and sell through a brokerage firm or a savings account such as the 401(k). Because they’re not buying on someone else’s behalf, they most often would be driven by their own personal financial goals such as saving for retirement, future educational needs or a large personal purchase. 

Retail investors inherently have smaller purchasing power, which typically results in higher fees on their trades.

Advantages for Retail Investors

Despite being “smaller,” there are actually many advantages for retail investors. 

• Easy to Invest - Because investments are small and personalized, retail investors have much more freedom than institutional investors do. They can choose from any size company, which opens the door to many more investment opportunities.

• In It for the Long Game - Retail investors can often stay vested for a much longer period of time, as opposed to institutional clients, who expect regular results and returns.

• Personal Interest - Because a retail investor is using his or her own money, they have the ability and freedom to invest in vehicles and opportunities that they actually have a personal interest in. For the investor who enjoys the “game” (watching and monitoring individual investments), this can be a huge reward in and of itself. 

• Liquidity - Buying and selling shares on a smaller scale means investments are more liquid for the retail investor in general.

• Diversification - Because they are investing for themselves, retail investors can put a huge emphasis on any category or type of investment. While diversification is of course optimal, they are not bound by any requirements and can ultimately invest where and how they see fit.

What is an Institutional Investor?

Wondering who are institutional investors? Simply put, they invest money for other people. They not only deal in bigger investments and portfolios, but they’re also responsible for most of the movement on the New York Stock Exchange (NYSE). In fact, about three quarters of all trades on the NYSE are made by institutional investors.

Institutional investors' examples can be seen in the handling and overseeing of larger investments like pension plans through companies, mutual funds, insurance companies,  hedge funds, commercial trusts, money managers or investment banks, just to name a few. They’re very knowledgeable and sophisticated and also have the ability to negotiate fees because of the large-scale investments they make. 

Advantages for Institutional Investors

Just like retail investors, institutional investing offers a number of advantages.

• Fees - Perhaps the biggest advantage for institutional investors is they deal in such large transaction amounts that they see significant discounts on trader and broker fees. There may also be discounts on commissions and other fees.

• Access to Securities - Due to their size, institutional investors often have incredible access to securities that simply aren’t available to retail investors. For example, an institutional investor may be privy to an Initial Public Offering (IPO) offering price, which will be different from the opening price that becomes available to everyone on the open market.

• Bulk Buying- Institutional investors can buy in bulk. As a result of their greater buying power, they can buy more shares at a single time.

• Influence - Institutional investors have historically had a greater impact and influence on both the companies they decide to invest in, as well as the market overall.

• Access to Information - Access to traders and professional research as well as portfolio managers offers a significant advantage to institutional investors.

Final Thoughts

Though they’re vastly different in virtually all areas of investing - from types of investments, to the buying power they have, to what their overall intentions are - understanding the differences between retail and institutional investor definitions can only make you a more savvy and powerful investor. So whether you’re the independent, smaller retail investor, or you’re an institutional investor with great power behind your purchases and opportunities, making your money work for you it’s always a good investment.