Institutional Investors vs. Retail Investors: What's the Difference?

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.

Institutional Investors

Institutional investors are the big guys on the block—the elephants with a large amount of financial weight to push around. They are the pension funds, mutual funds, money managers, insurance companies, investment banks, commercial trusts, endowment funds, hedge funds, and also some private equity investors. Institutional investors account for more than 85% 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 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 normal investors do not, such as investment opportunities with large minimum buy-ins.

Retail Investors

Retail, or non-professional, investors are individuals. Typically, retail investors buy and sell debt, equity, and other investments through a broker, bank, and 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 they have more access than ever before to solid financial information, investment education, and sophisticated trading platforms, retail investors may be vulnerable to behavioral biases. They may fail to understand the ways a mass of investors can drive the markets.

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.