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Retail and institutional investors: Definitions, comparison, difference
Feeling sidelined by the plethora of people and businesses claiming to be ‘investing pros’?
Uncover how the giants of investing play with this exploration into institutional investing and how it compares to what most individuals do, retail investing.
The term ‘retail investor’ became ubiquitous in the surge of interest in investing since the 2020 Covid-19 pandemic. But what does it actually mean, and more importantly, what opportunities and challenges does it bring for individuals like you venturing into the world of investing?
Uncover how the giants of investing play with this exploration into institutional investing and how it compares to what most individuals do, retail investing.
The term ‘retail investor’ became ubiquitous in the surge of interest in investing since the 2020 Covid-19 pandemic. But what does it actually mean, and more importantly, what opportunities and challenges does it bring for individuals like you venturing into the world of investing?
QUOTE
“An investment in knowledge pays the best interest.”
Big ideas
- Retail investors can face restrictions accessing opportunities like IPOs, while institutional investors enjoy broader access due to significant capital and industry connections.
- Institutional investors significantly influence market trends because of the scale of their investments. Retail investors hold relatively little sway but that has begun to change since the ‘GameStop saga’.
- Retail investors benefit from increased protections against investment risks, while institutional investors, presumed to ‘know better’, are afforded fewer safeguards.
What are retail investors? Definition and meaning
DEFINITION
A retail investor is an individual who invests their own money into stocks, bonds, mutual funds, and other similar vehicles.
Unlike institutional investors, these individuals are not professional traders or investment entities but are everyday people investing on their own behalf, looking to grow their savings or prepare for future financial goals.
They participate in the market through personal accounts and, typically, with much more limited capital compared to their institutional counterparts.
They participate in the market through personal accounts and, typically, with much more limited capital compared to their institutional counterparts.
Pros & cons of being a retail investor
Being a retail investor comes with its own set of advantages.
Flexibility is one; you have the liberty to make investment decisions based on personal preferences and financial goals. Additionally, technology has bridged many gaps, granting retail investors access to a plethora of information and analytical tools that were once the reserve of professional traders.
However, the journey isn't without its challenges.
Retail investors often grapple with limited access to comprehensive, real-time information and may not have the financial clout to influence market trends. Moreover, the fees associated with trading can be relatively higher for individuals than for large institutions, impacting the overall returns on investments.
Flexibility is one; you have the liberty to make investment decisions based on personal preferences and financial goals. Additionally, technology has bridged many gaps, granting retail investors access to a plethora of information and analytical tools that were once the reserve of professional traders.
However, the journey isn't without its challenges.
Retail investors often grapple with limited access to comprehensive, real-time information and may not have the financial clout to influence market trends. Moreover, the fees associated with trading can be relatively higher for individuals than for large institutions, impacting the overall returns on investments.
Who are retail investors?
In the UK, retail investors are a burgeoning community. They range from university students dabbling in stocks with their smartphones to retired individuals meticulously managing their portfolios for optimal returns.
The democratisation of finance, spurred by the advent of trading apps like Trading 212, has lowered entry barriers, enabling a broader spectrum of the populace to immerse in the investing domain.
The democratisation of finance, spurred by the advent of trading apps like Trading 212, has lowered entry barriers, enabling a broader spectrum of the populace to immerse in the investing domain.
There is an inherent diversity within the retail investor landscape. It’s not a monolithic entity but a vibrant, varied community, each member with unique aspirations, strategies, and risk tolerances.
One of the best investing communities out there is through the ‘community forum’ section of the Trading 212 investing app. These communities are sub-divided into categories like dividends or Apple (AAPL) stock. All those in communities invest with Trading 212, which offers fractional shares investing in pre-market and after-hours trading.
One of the best investing communities out there is through the ‘community forum’ section of the Trading 212 investing app. These communities are sub-divided into categories like dividends or Apple (AAPL) stock. All those in communities invest with Trading 212, which offers fractional shares investing in pre-market and after-hours trading.
What are institutional investors? Definition and meaning
DEFINITION
Institutional investors are entities or organizations that pool together large sums of money to invest in a variety of asset classes, including but not limited to stocks and ETFs.
They operate on a scale that’s often vast, compared to individual retail investors. Common examples include pension funds, mutual funds, insurance companies, and hedge funds. These entities are characterised by their substantial buying power, access to sophisticated investment strategies, and a professional team managing the investments.
Types of institutional investors
The landscape of institutional investors is variegated, each type with its distinct characteristics. Pension funds manage retirement savings, prioritizing long-term growth and stability. Mutual funds aggregate capital from multiple investors to diversify across assets. Hedge funds, known for their agility, often employ complex strategies to achieve high returns.
Each type plays a specific role, contributing to the multifaceted tapestry of the financial markets.
Pros & cons of being an institutional investor
Institutional investors add greatly to market liquidity and stability. Their substantial capital base and professional management enable them to undertake extensive research and analysis, shaping informed investment decisions. Moreover, their large-scale operations often translate to lower transaction costs, optimizing the efficiency of their investment strategies.
However, it’s not a terrain devoid of challenges. Institutional investors can sometimes influence market volatility due to the sheer volume of their trades. There’s also a level of complexity and regulatory scrutiny associated with their operations, necessitating stringent risk management protocols and compliance measures to navigate the dynamic financial ecosystem effectively.
However, it’s not a terrain devoid of challenges. Institutional investors can sometimes influence market volatility due to the sheer volume of their trades. There’s also a level of complexity and regulatory scrutiny associated with their operations, necessitating stringent risk management protocols and compliance measures to navigate the dynamic financial ecosystem effectively.
Comparative analysis: Retail vs. institutional investors
The financial ecosystem is marked by the co-existence of retail and institutional investors, each with distinct traits, advantages, and challenges. Here, we unveil the dynamics that characterize these two classes of investors.
1. Investment volume/access
Institutional investors, with their colossal financial arsenal, often have privileged access to a broad array of investment opportunities, including IPOs and private equity.
Retail investors, whilst embodying flexibility and agility, typically have a more constrained access, navigating the markets with more modest capital bases. This divergence in access underscores a fundamental distinction between the two investor classes.
Retail investors, whilst embodying flexibility and agility, typically have a more constrained access, navigating the markets with more modest capital bases. This divergence in access underscores a fundamental distinction between the two investor classes.
2. Knowledge/research
On the knowledge front, institutional investors often boast a robust research infrastructure fortified by teams of experts, real-time data, and advanced analytical tools.
Retail investors, though increasingly empowered by digital tools and online resources, might face a more limited scope in obtaining and analysing intricate data. This differential can impact decision-making and investment outcomes.
Retail investors, though increasingly empowered by digital tools and online resources, might face a more limited scope in obtaining and analysing intricate data. This differential can impact decision-making and investment outcomes.
3. Fees
Fees present another arena of divergence. Institutional investors, due to the voluminous nature of their transactions, often incur lower fees, enhancing cost efficiency.
Retail investors operating on a smaller scale may encounter proportionately higher transaction costs. It’s a factor that’s integral to the investment equation, shaping net returns and overall investment efficiency.
Retail investors operating on a smaller scale may encounter proportionately higher transaction costs. It’s a factor that’s integral to the investment equation, shaping net returns and overall investment efficiency.
4. Temperament
Temperament and investment horizons offer another perspective. Institutional investors, anchored by structured strategies and risk management protocols, often exhibit a long-term orientation.
Retail investors, meanwhile, can exhibit varied temperaments, with some seeking short-term gains, rendering them more susceptible to market volatility. This dynamic interplay of temperaments influences market movements and stability.
As a retail investor, understanding these dynamics can offer profound insights, empowering you to navigate the market terrain with enhanced awareness and confidence whilst steering clear of specific investment prescriptions or endorsements.
Retail investors, meanwhile, can exhibit varied temperaments, with some seeking short-term gains, rendering them more susceptible to market volatility. This dynamic interplay of temperaments influences market movements and stability.
As a retail investor, understanding these dynamics can offer profound insights, empowering you to navigate the market terrain with enhanced awareness and confidence whilst steering clear of specific investment prescriptions or endorsements.
Retail investing was pushed to rise even more since 2020 onwards
The surge in retail investing, especially since the onset of the COVID-19 pandemic, is highlighted by fascinating statistics.
In 2020 alone, approximately 15% of current retail investors made their debut, with their presence in the market escalating from 17% in January to over 25% by mid-year. A striking revelation is that over 100 million users in the USA are registered across just six major online brokerage platforms, emphasizing the escalating popularity of these platforms among new traders.
In 2020 alone, approximately 15% of current retail investors made their debut, with their presence in the market escalating from 17% in January to over 25% by mid-year. A striking revelation is that over 100 million users in the USA are registered across just six major online brokerage platforms, emphasizing the escalating popularity of these platforms among new traders.
‘Generation investor’ demographics and perspectives
Attribute | Statistic |
Percentage of current retail investors who started in 2020 | 15% |
Retail investors' market presence in January 2020 | 17% |
Retail investors' market presence in July-August 2020 | >25% |
Median age of Generation Investor | 35 |
Pre-2020 median age of investors | 48 |
Percentage of Generation Investor planning to invest more | 43% |
Generation Investor feeling positive about the U.S. stock market | 75% |
Pre-2020 investors confident in the U.S. stock market | 63% |
US broker Charles Schwab labels those who commenced trading in 2020 as ‘Generation Investor,’ a diverse group with over 50% being millennials and boasting a median age of 35.
This contrasts significantly with the pre-2020 investor median age of 48.
Their optimism about the U.S. stock market is infectious, with approximately 75% expressing positivity, a sentiment that outshines the 63% optimism level of their pre-2020 counterparts.
The COVID-19 pandemic played a pivotal role in this uptick in retail investing.
A notable 55% of surveyed individuals shared they ventured into investing to build an emergency fund during these unprecedented times, while 53% sought an additional income source.
Individual stock trading hit a 10-year high in 2020, and retail investors made up about 19.5% of US equity trading volume, a significant leap from 14.9% in 2019 and a mere 10.1% in 2010. This evolution underscores the growing influence of retail players in the financial markets.
This contrasts significantly with the pre-2020 investor median age of 48.
Their optimism about the U.S. stock market is infectious, with approximately 75% expressing positivity, a sentiment that outshines the 63% optimism level of their pre-2020 counterparts.
The COVID-19 pandemic played a pivotal role in this uptick in retail investing.
A notable 55% of surveyed individuals shared they ventured into investing to build an emergency fund during these unprecedented times, while 53% sought an additional income source.
Individual stock trading hit a 10-year high in 2020, and retail investors made up about 19.5% of US equity trading volume, a significant leap from 14.9% in 2019 and a mere 10.1% in 2010. This evolution underscores the growing influence of retail players in the financial markets.
Other investor types (including HNWIs)
Beyond the prominent archetypes of retail and institutional investors, there lies a spectrum of other investor types. These entities, though less discussed, play crucial roles in financial markets:
Non-institutional investors
Non-institutional investors occupy a middle ground, neither entirely retail nor institutional. They are often high-net-worth individuals who possess significant, though not colossal, capital.
Their investment behaviours blend the agility of retail investors with the resource access akin to institutional investors. Navigating through the landscape, these entities diversify the market, introducing an additional layer of complexity and opportunity.
Their investment behaviours blend the agility of retail investors with the resource access akin to institutional investors. Navigating through the landscape, these entities diversify the market, introducing an additional layer of complexity and opportunity.
Retail and institutional funds
The contrasting worlds of retail and institutional investors are also echoed in the types of funds tailored to each. Retail funds are accessible to individual investors, often characterized by lower minimum investment thresholds and higher fees proportionate to investment amounts.
Institutional funds, conversely, are earmarked for large investors, featuring substantial minimum investment requirements but offering the boon of lower fees due to the economies of scale.
However, the biggest investment trend among both retail and institutional investors is the use of ETFs or Exchange-Traded Funds. These are usually passively managed funds that trade on a stock exchange, just like individual stocks.
Institutional funds, conversely, are earmarked for large investors, featuring substantial minimum investment requirements but offering the boon of lower fees due to the economies of scale.
However, the biggest investment trend among both retail and institutional investors is the use of ETFs or Exchange-Traded Funds. These are usually passively managed funds that trade on a stock exchange, just like individual stocks.
As we venture into 2023, the investment landscape is marked by evolving trends shaped by a symphony of economic, technological, and societal factors.
While the dance between retail and institutional investors continues, new patterns emerge, painting a dynamic tableau of opportunities and challenges.
While the dance between retail and institutional investors continues, new patterns emerge, painting a dynamic tableau of opportunities and challenges.
Retail investment strategy 2023
For retail investors, the focus remains on education, diversification, and adaptability. Emerging technologies and increased access to real-time data offer individual investors enhanced tools to inform their decisions. While specific strategies are personal and varied, the overarching narrative is one of empowered participation and increasingly informed decision-making.
Investors are solely responsible for their investment decisions and should always do their own research before investing in any product or service.
Investors are solely responsible for their investment decisions and should always do their own research before investing in any product or service.
Institutional investment trends
Institutional investment trends
Institutional investors are navigating an era marked by increased regulatory scrutiny, technological innovation, and global economic shifts. The focus is intensifying on sustainable and ESG (Environmental, Social, and Governance) investing, underscored by a global push towards ethical and responsible investment practices.
Though the strategies are as varied as the institutions themselves, a common thread weaves through – a move towards more transparent, ethical, and globally conscious investment approaches.
Institutional investors are navigating an era marked by increased regulatory scrutiny, technological innovation, and global economic shifts. The focus is intensifying on sustainable and ESG (Environmental, Social, and Governance) investing, underscored by a global push towards ethical and responsible investment practices.
Though the strategies are as varied as the institutions themselves, a common thread weaves through – a move towards more transparent, ethical, and globally conscious investment approaches.
Recap
Institutional and retail investors represent distinct pillars of the financial landscape. While institutional investors handle substantial capital on behalf of organizations or high-net-worth individuals, retail investors manage their personal portfolios.
The article outlines the differences in terms of investment access, knowledge, fees, and their general approach to investing. Understanding these disparities is crucial for navigating the diverse terrain of the financial markets.
The article outlines the differences in terms of investment access, knowledge, fees, and their general approach to investing. Understanding these disparities is crucial for navigating the diverse terrain of the financial markets.
FAQ
Q: What percentage of investors are institutional?
The percentage of institutional investors can vary greatly depending on the specific market and region. Generally, they are responsible for a significant portion of the total trading volume in many developed markets due to their large-scale investments.
Q: What is a retail fund?
A retail fund is an investment fund that's open to individual, or "retail," investors. These funds offer the opportunity for personal investors to pool their money together, which is then managed by professionals who allocate it across various assets.
Q: What is the investment limit for retail investors?
The investment limit for retail investors can differ by country and specific type of investment. Generally, there's no fixed "limit," but retail investors are often restricted in terms of access to certain types of advanced or high-volume investments due to capital and regulatory constraints.
Q: Can retail investors buy bonds?
Yes, retail investors can buy bonds. Bonds can be purchased directly from the issuer at the time of issuance, in the secondary market, or through bond funds, allowing retail investors various avenues to invest in both government and corporate bonds.
Q: Can retail investors short stocks?
Yes, retail investors can short stocks, typically by borrowing shares to sell them at the current price with the plan to buy them back later at a lower price. However, shorting involves significant risks and is subject to specific regulations and margin requirements.
Q: Can retail investors buy treasury bills?
Yes, retail investors have the ability to buy treasury bills.
They can be purchased directly through the government’s treasury or via the secondary market, offering a low-risk investment option for individuals.
They can be purchased directly through the government’s treasury or via the secondary market, offering a low-risk investment option for individuals.
Q: Can retail investors buy credit default swaps?
Credit default swaps are generally more accessible to institutional investors due to their complexity, risk, and the regulatory environment. However, sophisticated retail investors with significant capital and knowledge can potentially access them through certain platforms or financial intermediaries.
Q: Who are retail investors in an IPO?
Retail investors in an IPO are individual investors who purchase the newly listed company's shares during its initial public offering. They typically buy the shares hoping for a price increase post-listing, and they're often allocated a certain portion of shares separate from institutional investors.
Q: What is a domestic institutional investor?
A domestic institutional investor is an organization or entity based in the same country where it invests. Examples include local mutual funds, pension funds, and insurance companies that manage and invest large pools of capital within their home country.
Q: What is foreign institutional investor?
A foreign institutional investor is an entity that invests in the financial markets of a country outside its own. FIIs can include hedge funds, insurance companies, and pension funds, and they are subject to certain regulations and restrictions in the countries where they invest.
