Difference between Institutional and Retail Investors

Posted by Dr. Reuter Investor Relations on March 13th, 2020

Institutional investors and non-institutional investors are not the same. There are a plethora of differences between both types of investors. Knowing the difference between both categories is worthwhile especially when you are interested in plunging to the domain of investor relations and looking for potential investors who can invest in your company. The distinction between these investors not dictates the size of the trades they deal in but also the type of companies and financial institutions where they invest their money.                                                                                                                                                                                              Institutional Investors

An institutional investor is an entity either as a person or an organization that pools money to trade securities, real estate property, and other assets in huge quantities. The money used by institutional investors is not the money that they actually own. They invest money of other people on their behalf. In reality, they are known for trading large sized shares and responsible for making a dramatic impact on the movements of stock markets.

Often, these investors are pension funds, mutual funds, hedge funds, investment banks, commercial trusts, money managers, and private equity investors. They are subjected to less protective regulations as it is assumed that they are sophisticated, well-equipped, well-informed and more able to protect themselves. 

If you have a pension plan or any kind of insurance plan, it means you are actually benefiting from the expertise of institutional investors. 

Non-Institutional (or Retail) Investors

A retail investor is often a non-professional individual who purchases and sells securities via brokerage firms or saving accounts for his/her own personal account and profit rather than for an organization. Any investor who is not an institutional investor is referred to as a retail or non-institutional investor. 

Retail investors are those who buy and sell debt, equity, or other kinds of investments through other parties like brokers, banks, and real estate agents. Unlike institutional investors, they don’t invest on other people’s behalf. They manage their own money while making investments. Their driving force for investing comes from personal goals, for instance, retirement planning, saving money for children’s education, or financing a huge purchase i.e. house in most cases. Usually, they trade small quantities.   

Who has the more weightage - institutional investors or retail investors?

It is true that institutional investors, such as hedge funds, deal in different constituencies. They are capable of taking more risks, equipped with a more innovative and solid base, and don’t have to abide by the same rules and regulations. However, in reality, they are only a small percentage of the global wealth. They don’t make investment decisions without some assurance that their clients are comfortable with it.  

When it comes to retail investors, the momentum of retail interest is building up. It is believed that when we see all retail investors collectively, their influence is also significantly noticeable and has the power to produce unexpected results. 

Therefore, rather than treating the two kinds of investors as separate, companies who focus on institutionalinvestor relations also need to keep an eye on retail investor relations development.