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Scroll through the financial news on any given day and you’ll likely catch a few headlines about what institutional investors are up to. If you’re still somewhat new to investing, you may be wondering: Who are these institutional investors? Are they talking about me?
Chances are if you clicked on this article, you’re probably a non-institutional or “retail investor” – someone who invests for personal money goals, like retirement, rather than on behalf of other people. And that’s actually one of the key differences between retail and institutional investors.
Institutional investors are typically companies or organizations that invest money for other people (like you). These are your professionals, and they may include banks, pension funds and mutual funds, just to name a few. Because they buy and sell in large quantities, institutional investors are generally considered the big dogs in the investing world. Much of the trading activities you see on the New York Stock Exchange, for example, are usually from institutional investors.
Intrigued? Let’s take a closer look at retail and institutional investors.
Think of a retail investor as the regular individual investor. And by regular, we mean non-professionals who typically invest in things like stocks, bonds and ETFs through an investment advisory or brokerage firm. Retail investors put up their own money towards personal goals like retirement, wealth building, kids’ college fund, etc. If you have an IRA, 401(k) or individual investment account, you’re probably a retail investor.
Retail investors often buy and sell securities in smaller amounts (and trade less frequently) than institutional investors. And that makes sense if you think about it. Since institutional investors invest on behalf of others, they have access to large pools of money, allowing them to trade in bulk.
We mentioned earlier that institutional investors are companies that pool and invest money for other people. But who are these investors exactly? When you think of institutional investors, think big. Some common types of institutional investors include:
Institutional investors are responsible for making investment decisions on behalf of their members or shareholders. Often times, the money they manage come from retail investors like yourself. For instance, if you have a pension plan or invest in a mutual fund, an institutional investor is probably helping you invest your money.
Because of their investment know-how and access to large sums of money, institutional investors could do some things that retail investors cannot. For example, they may have access to certain alternative investments such as private equity or hedge funds. These types of investments usually have high minimum investment requirements (we’re talking about millions of dollars), which means they’re often only available to institutional investors or individuals with a high net worth.
Now that you have an overview of these two types of investors, let’s look at three key ways that retail and institutional investors differ.
As a retail investor, you’re the boss when it comes to deciding how and where you want to put your money. (All that responsibility may be one reason why some investors turn to a financial advisor for help. Making these decisions can be tough!)
Institutional investors, on the otehr hand, have teams of experts that work together to identify strategies and opportunities for the money they manage. And this should come as no surprise: Because institutional investors are professionals, they have access to investment research, data and analysis that may not be readily available to the average investor.
We’ve already touched on this a little bit. Retail investors buy and sell in smaller quantities and tend to trade less frequently than institutional investors. While retail investors may trade a few shares at a time, institutional investors could trade up to 10,000 or more shares in their transactions!
Because they typically trade in bulk, institutional investors can negotiate the fees on their investments – something that many retail investors can’t do – and often face lower trading or transaction costs. Their large trades also mean institutional investors have a greater influence on how markets move. Much of the activities you see in the stock market are driven by institutional investors.
Being professionals, institutional investors have certain advantages when it comes to investing. Mainly, they know what they’re doing. The same cannot be said for every retail investor. And this is one reason why the Securities and Exchange Commission (SEC) has more rules and regulations in place to protect the average investor.
The SEC’s Regulation Best Interest is a good example of looking out for the “little guys.” It sets a standard of conduct for broker-dealers, including a requirement for them to “act in the best interest of the retail customer” when making recommendations.
If you’re just getting started as a retail investor, it’s important to get a handle on the fundamentals of investing. Understanding the potential risk and reward can help you choose an investment strategy that best fits your personal money goals – this is true whether you’re a newbie or a more seasoned investor. At Marcus, we love talking about this stuff and have plenty of investing resources to help bring you up to speed.
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