Retail Investor vs. Institutional Investor: What’s the Difference

October 15, 2021

At the end of the day, there are two types of investors in the market: retail investors and institutions. It can be confusing to tell the difference, but there are some very fundamental differences between the two groups in terms of who they are, how they invest and the goals they are targeting with their investments.

Odds are that if you’re reading this you’re a retail investor versus an institutional investor. Institutional investors are companies that invest money for other people. They often include mutual funds, pension funds, banks, and others.

Because these investors buy and sell in large quantities, they’re considered to be the big dogs because such activity impacts markets. You can attribute all of the activity you see on the NYSE to institutional investors.

Want to learn more? We’ve got you covered. Here’s what you need to know about retail investors vs. institutional investors.

What is a retail investor?

A retail investor is an individual investor, not a professional trader or investment firm. They’re everyday people that typically invest in stocks, bonds, and ETFs through a brokerage firm or investment advisory.

Retail investors invest their own money to achieve personal goals, including:

  • Wealth building
  • Retirement
  • Saving for college

If you have a 401(k), IRA, or an individual investment account, you’re most likely to be a retail investor.

When compared to institutional investors, retail investors often buy and sell in smaller amounts and tend to trade less frequently. Because institutional investors invest for others, they have access to large amounts of money. This allows them to buy, sell, and trade in bulk with unique terms that aren’t available to retail investors.

What are institutional investors

As mentioned, institutional investors are companies that collect and invest money for clients. When you think of these types of investors, think big. The most common institutional investors are:

  • Investment banks
  • Mutual funds
  • Hedge funds
  • Pension funds
  • Endowment funds
  • Insurance companies

Institutional investors make investment decisions on behalf of their shareholders and members. In fact, much of the money they manage comes from retail investors. For example, if you invest in a mutual fund or have a pension plan there’s a good chance that an institutional investor is investing your funds.

Because these investors have experience and access to large amounts of money, they can do things that retail investors cannot. For instance, an institutional investor may have access to alternative investments, such as hedge funds or private equity.

These investments have extremely high minimum investment requirements, which means they’re only available to institutional investors. In some instances, an individual with a high net worth can also access these special investments.

Key differences between retail and institutional investors

Now that you know what a retail and an institutional investor is, let’s look at how they’re different.

  1. Access to resources and investment decision-making

Retail investors are their own boss. When it comes to deciding how much and where to invest your money, you’re the one calling all of the shots. However, for investors with little no experience, making these decisions quickly becomes confusing and overwhelming.

For this reason, many retail investors turn to financial advisors for advice and direction.

On the other hand, institutional investors know the markets like the back of their hand. They often have teams of experts working full-time to identify opportunities and strategies for the large pools of money that they manage. That leads to different approaches to the market.

  1. Market influence

Retail investors have access to less funds to invest, which means that they buy and sell in smaller quantities. Retail investors also trade less frequently. While a retail investor may trade a couple of shares at a time, it’s not uncommon for institutional investors to trade 10,000 or more shares in a single transaction.

These large trades greatly influence market behavior. When you see movement on the stock market, it’s due to institutional investors.

Because institutional investors trade in bulk, they can negotiate fees. This is something that most retail investors can’t do. Institutional investors also pay lower transaction costs.

These people are professional investors who have access to investment data, analytics, and research. Much of these resources aren’t readily available to the average investor.

  1. SEC protection

Institutional investors are at a big advantage due to the simple fact that they know what they’re doing. This isn’t true for every retail investor. The Securities and Exchange Commission (SEC) exists to protect and look out for the little guys.

The SEC has all sorts of rules and regulations in place to protect the average investor, including:

  • Monitoring stock volatility
  • Requiring brokers to “act in the best interest of the retail customer”
  • Examining areas of risk that could harm retail investors
  • Fees, expenses, and related disclosures
  • Examining misappropriation

Because institutional investors are informed and experienced, they don’t need the same protections as an everyday investor looking to grow their retirement account. And because institutional investors manage funds for others, its their clients who need the added protection.

How to invest like an institution

Just because you don’t have millions and millions of dollars to manage and invest, doesn’t mean that you can’t learn from institutional investors. Following their lead and using similar investing techniques can be quite advantageous.

  • Diversify your portfolio (equity, fixed income, alternative investments, etc.)
  • Work on longer time horizons
  • Engulf yourself in the financial world
  • Review annual reports, balance sheets, etc.

While you may be miles apart from an institutional investor, taking the same overall approach by setting risk limits and determining the best strategies, can take you and your investment portfolio farther than you think.

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.