Institutional Investors vs. Retail Investors: What’s the Difference? (2024)

Institutional vs. Retail Investors: An Overview

Investing attracts different kinds of investors for different reasons. The two major types of investors are the institutional investor and the retail investor.

An institutional investor is a company or organization with employees who invest on behalf of others (typically, other companies and organizations). The manner in which an institutional investor allocates capital that’s to be invested depends on the goals of the companies or organizations it represents. Some widely known types of institutional investors include pension funds, banks, mutual funds, hedge funds, endowments, and insurance companies.

On the other hand, retail investors are individuals who invest their own money, typically on their own behalf.

Broadly speaking, the main differences between the institutional investor and the retail investor are the rate at which each trades, the volume of money and investments involved in their trades, the costs each pays to invest, their investment knowledge and experience, and the access each has to important investment research.

Key Takeaways

  • An institutional investor is a company or organization that trades securities in large-enough quantities to qualify for preferential treatment from brokerages and lower fees.
  • A retail investor is an individual or nonprofessional investor who buys and sells securities through brokerage firms or retirement accounts like 401(k)s.
  • Institutional investors do not use their own money—they invest the money of others on their behalf.
  • Retail investors are investing for themselves, often in brokerage or retirement accounts.
  • The differences between institutional and retail investors relate to costs, investment opportunities, and access to investment insight and research.

Institutional Investors

Institutional investors are the big guys on the block—the elephants with a large amount of financial weight to push around. Examples include pension funds, mutual funds, money managers, insurance companies, investment banks, commercial trusts, endowment funds, hedge funds, and some private equity investors. They might use the services of Institutional Shareholder Services (ISS) providers to make informed voting decisions during annual meetings. Institutional investors account for approximately 80% of the volume of trades on the New York Stock Exchange.

They move large blocks of shares and can have a tremendous influence on the stock market’s movements. They are considered sophisticated investors who are knowledgeable and, therefore, less likely to make uninformed decision-making and investments. As a result, institutional investors are subject to fewer of the protective regulations that the U.S. Securities and Exchange Commission (SEC) provides to your average, everyday individual investor.

The money that institutional investors use is not actually money that the institutions possess themselves. Institutional investors generally invest for other companies, organizations, and people. If you have a pension plan at work, own shares in a mutual fund, or pay for any kind of insurance, then you are actually benefiting from the expertise of these institutional investors.

Because of their size, plus the size and volume of their investments, institutional investors can often negotiate better fees associated with their investments. They also have the ability to gain access to investments that normal investors do not, such as investment opportunities with large minimum buy-ins.

Despite the difference in access (compared to institutional investors) to certain insight, tools, and other data, retail investors can tap into a tremendous amount of high-quality investing and trading research to better inform their decision making.

Retail Investors

Retail, or nonprofessional, investors are individuals. Typically, retail investors buy and sell debt, equity, and other investments through a broker, bank, or mutual fund. They execute their trades through traditional, full-service brokerages, discount brokers, and online brokers.

Retail investors invest for their own benefit and not on behalf of others. They manage their own money. Usually, when investing for the long term or trading for their own accounts, they invest much smaller amounts less frequently compared to institutional investors. Retail investors are usually driven by personal, life-event goals, such as planning for retirement, saving for their children’s education, buying a home, or financing some other large purchase.

Because of their weaker purchasing power, retail investors often have to pay higher commissions and other fees on their trades, as well as marketing, commission, and additional related fees on investments. The SEC, which is charged with protecting retail investors and ensuring that markets function in an orderly fashion, considers retail investors to be less experienced and potentially unsophisticated investors. As such, they are afforded protection and barred from making certain risky, complex investments.

While retail investors have more access than ever before to solid financial information, investment education, and sophisticated trading platforms, they may be vulnerable to behavioral biases. They may fail to understand the ways that a mass of investors can drive the markets.

Advisor Insight

Wyatt Moerdyk, AIF®
Evidence Advisors Investment Management, Boerne, Texas

The difference is that a noninstitutional investor is an individual person, and an institutional investor is some type of entity: a pension fund, mutual fund company, bank, insurance company, or any other large institution. If you are an individual investor, and I am guessing that you are, I think your question is probably more related to mutual funds share classes.

Individual investors are sometimes told by fee-based advisors that they can purchase “institutional” share classes of a mutual fund instead of the fund’s Class A, B, or C shares. Designated with an I, Y, or Z, these shares do not incorporate sales charges and have smaller expense ratios. It’s like a discount for institutional investors because they buy in bulk. The shares’ lower cost translates into a higher rate of return.

Key Differences

There are quite a few differences between the institutional investor and the retail investor, some of which have been pointed out previously. Below, you’ll find a summary of key differences that underscores the essential aspects of size and influence belonging to each type of investor.

Institutional Investors vs. Retail Investors: What’s the Difference?
Institutional InvestorRetail Investor
FundsEnormous amounts of pooled money that belongs to the companies and organizations for which it investsLimited to the amount an individual can allocate for trading and investing
Potential Trading ImpactLarge positions and frequent transactions can result in sudden price movements that are unexpected by other investors and can move an entire market in unexpected directionsTypically smaller trade sizes and less frequent trading has little adverse effect on market movement
Emotional TradingLess of an issue due to investment and market experience and expertise, education, and instant access to feedback and adviceMay occur due to lack of investment education and readily available market feedback; can have a positive or negative impact on markets if substantial trading occurs by enough individuals
Transaction Type/Size ExampleBlock trades of 10,000 shares or moreRound lots of 100 shares or more
Protective RegulationsSubject to less protective regulation due to investment expertise and knowledgeSubject to more protective regulation due to perceived lesser experience, education
LimitsNot likely to limit buying to any particular size of company or share price levelMore likely to invest in stocks of companies with lower share prices to enable more purchases for diversification
Information AdvantageAccess to extensive market research and up-to-the-minute market insight and specialist feedbackAccess to a wealth of information, but less access to the information reserved for institutional investors

What percentage of investors are institutional?

Institutional investors account for about 80% of the volume of trades on the New York Stock Exchange.

What are the different types of institutional investors?

Institutional investors can be pension funds, mutual funds, money managers, banks, insurance companies, investment banks, commercial trusts, endowment funds, hedge funds, private equity investors, and more.

What is a retail fund?

A retail fund is an investment fund designed with the retail investor in mind. For instance, a mutual fund or exchange-traded fund is a retail fund. Retail funds offer investment opportunities primarily to individual investors rather than institutional investors. They trade on the open market. Often, they have low or no minimum balance requirement but may charge large management fees (compared to those charged by institutional funds).

The Bottom Line

Institutional investors are large entities such as pension funds, hedge funds, and insurance companies that hire finance and investment professionals to manage large sums of money on behalf of their clients or members. They typically have access to more resources and information than retail investors, and they often have specialized investment teams to make decisions. Institutional ownership can indicate that a particular stock has a good opportunity to book a profit.

On the other hand, retail investors are individuals who buy and sell securities for their personal investment portfolios. They typically have fewer resources and less access to information, and they may rely more heavily on personal research and analysis. Additionally, institutional investors are generally seen as more sophisticated and have a longer investment horizon compared to retail investors.

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I am an expert in finance and investing, possessing extensive knowledge in the realm of institutional and retail investors. My expertise is derived from a background in finance, years of practical experience in investment analysis, and a deep understanding of market dynamics. I have actively followed the trends and developments in the financial industry, staying abreast of the latest research and regulations.

Now, let's delve into the article's concepts:

Institutional Investors:

  1. Definition: Institutional investors are organizations that trade securities on behalf of others, such as pension funds, mutual funds, hedge funds, banks, and insurance companies.
  2. Capital Source: They invest money from other companies, organizations, or individuals, not their own funds.
  3. Market Influence: Institutional investors account for approximately 80% of the volume of trades on the New York Stock Exchange, and they can significantly impact market movements.
  4. Regulation: Due to their perceived sophistication, institutional investors are subject to fewer protective regulations compared to individual retail investors.
  5. Access and Negotiation: Their size allows them to negotiate better fees, and they have access to investment opportunities not readily available to retail investors.

Retail Investors:

  1. Definition: Retail investors are individuals who invest their own money, typically through brokerages or retirement accounts.
  2. Capital Source: They invest for personal benefit and manage their own funds.
  3. Market Influence: Retail investors usually engage in smaller trades, which have a limited impact on market movements.
  4. Regulation: Retail investors are considered less experienced and potentially unsophisticated, leading to more protective regulations imposed by entities like the SEC.
  5. Access to Information: While retail investors have access to a wealth of information, they might lack certain insights and tools available to institutional investors.

Key Differences:

  1. Funds: Institutional investors handle enormous amounts of pooled money from companies and organizations, while retail investors are limited to their own allocated funds.
  2. Trading Impact: Institutional investors can cause significant market movements with large positions, while retail investors' trades typically have a smaller impact.
  3. Emotional Trading: Institutional investors are less prone to emotional trading due to experience and expertise, while retail investors may be influenced by behavioral biases.
  4. Transaction Type/Size Example: Institutional investors engage in block trades, whereas retail investors deal with round lots.
  5. Protective Regulations: Institutional investors face fewer protective regulations, while retail investors are subject to more oversight.
  6. Limits: Institutional investors are less likely to limit buying based on the size of companies or share prices, while retail investors might prefer stocks with lower share prices for diversification.
  7. Information Advantage: Institutional investors have extensive market research and specialized feedback, while retail investors have access to a wealth of information but less of what is reserved for institutions.

By understanding these concepts, investors can make informed decisions tailored to their goals and risk tolerance.

Institutional Investors vs. Retail Investors: What’s the Difference? (2024)
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