No investor is the same when it comes to the stock market, and when it comes to institutional, there are quite a number of distinct differences. It is important to understand the differences before engaging in stock trading and investment in the stock market. There may be a possibility that an investor does not possess the qualification of an institutional investor when he considers an investment in a mutual fund or stock that has been publicized in the press.
Who Are Institutional Investors?
An institutional investor is an individual or organization that engages in trading in securities in quantities large enough to qualify for preferential management and lower fees. Institutional investors are the elephants of the stock market. They comprise mutual funds, pension funds, insurance companies, money managers, commercial trusts, hedge funds, endowment funds, and include private equity investors as well.
Institutional investors are responsible for approximately three-fourth of the trading volume in the stock market. They shift significant blocks of stocks and wield a huge influence on the movement of the stock market. The institutional investor pools money for buying real property, securities, loans, and other investment assets. They are highly sophisticated and, as such, may get exempted from particular securities laws and regulations. For example, in the US, an institutional investor is eligible to buy private placements under Rule number 506 or Regulation D as an accredited investor.
Who Are Retail or Non-institutional Investors?
Just as the name suggests, the non-institutional or retail investors are investors who are not institutional. The non-institutional investors include every individual who engages in the buying and selling of equity, debt, and other investments through a bank, top forex brokers, real estate agent, and so forth. The non-institutional investor does not invest on someone else’s behalf; instead, he manages his money. He is driven by personal objectives like retirement planning, financing a significant purchase, saving up for the education of the child, and so on.
The purchasing power of the retail investor is low, and so he has to pay a higher amount of transaction fees for trading. He has to make higher fee payments for the commission, marketing, and other related activities as well. The non-institutional investors are not institutional investors. However, they are still offered with some protective laws and prevented from making complex and risky investments.
Even though the retail investor does not invest as much as institutional investors, yet there is a class of wealthy retail investors who invest in hedge funds and private equity. The critics of retail investors claim that these investors do not possess the expertise and knowledge of researching their investments. As a result of the lack of research, the retail investor ends up undermining the role of the market in the efficient allocation of resources. Retail investors cause crowded trades in the market and trigger panic selling, which is detrimental to the market. The non-institutional investors are susceptible to market biases and often under-estimate the driving force of the masses in the market. However, the retail investor wields a significant impact on market sentiment. The predictors of the pattern of market sentiment comprise of mutual fund flows, survey data, stockbrokers, and first-day performance of IPOs.
The non-institutional investors have more access to financial information, trading tools, and investment education as compared to institutional investors. With a dramatic dip in brokerage fees and advancement in mobile trading, retail investors can now actively control their portfolios online. The retail investors make minimal investments or deposits of around a few hundreds of dollars, and the roboadvisors and ETFs do not even need to make any investment at all. That being said, retail investors still need to engage in a good amount of research for making substantial gains. More than fifty million households of the US are into retail investment as of today.
What is the Difference Between Institutional and Retail Investors?
The comparative study of Institutional vs. retail investors is simple. The non-institutional investor is an individual who engages in investments, whereas the institutional investor is an entity like a pension fund, bank, mutual fund, insurance company, and other institutions. The retail investors invest a smaller amount as compared to the amount invested by institutional investors.