What’s the Difference Between Institutional and Retail Investors?
An Overview of Institutional vs. Retail Investors
Investors are not all the same, and there are many distinctions between institutional investors and non-institutional, or retail, investors. It’s important to know the difference. If you’re thinking about investing in a stock or mutual fund that has been widely covered in the financial press, you probably don’t qualify as an institutional investor. Indeed, if you’re wondering what an institutional investor is, you’re probably not one. Let us use of this chance to outline some of the distinctions.
Takeaways Points
• A person or organization that trades securities in big enough volumes to qualify for preferential treatment and cheaper costs is known as an institutional investor.
• A retail investor is a non-professional or person who purchases and sells stocks via brokerage companies or savings accounts such as 401(k)s.
• Institutional investors do not invest their own money; instead, they invest the money of others.
• Retail investors make their own investments, usually in brokerage or retirement accounts.
Investing Institutions
Institutional investors are the elephants of the investment world. Pension funds, mutual funds, money managers, insurance firms, investment banks, commercial trusts, endowment funds, hedge funds, and certain private equity investors are among these investors. The volume of trading on the New York Stock Exchange is dominated by institutional investors, who account for more than 85% of all deals.
They trade enormous blocks of stock and have a significant impact on stock market movements. Institutional investors are subject to fewer of the protective rules that the Securities and Exchange Commission (SEC) gives to the typical, everyday investor since they are regarded sophisticated investors who are aware and therefore less likely to make foolish decisions.
The money used by institutional investors is not money owned by the institutions themselves. Institutional investors often invest on behalf of others. If you have a workplace pension plan, a mutual fund, or any kind of insurance, you are taking use of institutional investors’ knowledge.
Institutional investors may typically negotiate lower fees on their investments due to their scale. They also have access to investments that ordinary investors do not, such as big minimum buy-in investment options.
Non-Institutional Investors (or Retail Investors)
Any investor who is not an institutional investor is classified as a retail, or non-institutional investor. That includes almost everyone who uses a broker, bank, or real estate agent to acquire and sell debt, equity, or other assets. These individuals are not investing on behalf of others; rather, they are managing their own funds. Personal ambitions, such as preparing for retirement, saving for their children’s education, or funding a significant purchase, motivate non-institutional investors.
Retail investors frequently have to pay greater costs on their transactions, as well as marketing, commission, and other associated expenses, due to their limited buying power. Retail investors are considered unsophisticated investors by the SEC, they are provided with certain safeguards and are prohibited from making some hazardous, complicated transactions.
Insight
A non-institutional investor is a private individual, while an institutional investor is a business entity such as a pension fund, mutual fund firm, bank, insurance company, or other major corporation.
If you’re an individual investor, as I assume you are, I believe your query is more likely to be about mutual fund share classes. Fee-based advisers may tell individual investors that they may buy “institutional” mutual fund share classes instead of the fund’s Class A, B, or C shares. These shares, denoted by an I, Y, or Z, do not include sales charges and have lower expense ratios. Because institutional investors purchase in quantity, it’s like a bargain. The cheaper cost of the shares corresponds to a greater rate of return.
