What is the difference between institutional and retail investors? Institutional investors are usually large-scale funds, such as pension funds and endowment funds, that invest large amounts of money.
Retail investors are usually individual investors with modest amounts of money to invest. What does this all mean for you? Investing in the stock market can be risky, as the stock prices can fluctuate.
When retail investors invest, they have a smaller amount of money to risk. Institutional investors, on the other hand, have a lot of money invested, so they can afford to take bigger risks.
What this means for you is that when the stock market is doing well, retail investors are usually the first to benefit. Institutional investors benefit from increasing.
Did you know the type of investor who holds your retirement account could be the difference between a comfortable retirement and a life of poverty? It’s true! We all know that the stock market is volatile.
But the type of account you have can make a HUGE difference. Specifically, the type of account you have can affect how much risk your retirement money is exposed to.
Here’s the difference between the two account types and how each one affects your savings.
What is an Institutional Investor?
According to Investopedia, an institution is a type of “person or organization that engages in investing or investing-related business.” Institutional investors are often wealthy individuals, pension plans, corporate entities and hedge funds that possess a large amount of wealth. The specific factors that define an institutional investor can vary, but most institutional investors are responsible for managing a large portion of the money that goes into a retirement plan. They use that money to invest in stocks, bonds, mutual funds and other investment funds that have the potential to provide returns to those who invest. Institutional investors are usually very well-established entities, and those who are listed as institutional investors will usually publish their fees.
What is a Retail Investor?
Individual investors who are not considered institutional investors are not required to go through the process of registering for an account with a financial institution, and they do not require the financial institution to store their assets. Many traditional financial institutions do not care about this distinction and will generally require both institutional and retail investors to complete the registration and other steps required to start investing. Some investment firms have developed their own investment platforms that are designed to suit the needs of retail investors. These platforms typically offer a wider range of investment choices than those of their institutional counterparts, and they may require less paperwork to invest.
The Difference Between Institutional and Retail Investors
First and foremost, most people will say that retail investors are a “somewhat” healthier form of investor than those who have formal seats on the institutional investing committee, and have billions of dollars at stake in something like Apple. However, most investors will not be referring to “financial advisers” with $1 billion to $10 billion at stake. This is why I want to take a deeper look at the differences between institutional and retail investors, and highlight five ways that Institutional Investors have an advantage over retail investors in all situations. This first point might surprise you, and it’s all to do with the quality of your information. In general, institutional investors have much more robust information than retail investors.
The term ‘institutional investor’ refers to those whose holdings have a market capitalization of $10 billion and up, or $50 billion and up. Their portfolios are often large, complex, and complicated, and they are typically dealing with multiple clients simultaneously. By contrast, there are retail investors who invest in the stock market, but for many of them, money is their most important currency. According to a survey conducted in 2014 by Fidelity Investments, 41% of Americans have less than $5,000 saved, and 42% have less than $1,000. As such, the term ‘retail investor’ can be used to refer to a retail investor who has made purchases in the stock market; and who has had an investment account for the last three years.
“Are institutional investors investing money with the same risks as retail investors? In many cases the answer is yes, but the nature of these risks is fundamentally different. While some institutional investors do invest in securities that are subject to these types of risk, most institutional investors can only invest in assets that are (1) listed on major U.S. securities exchanges and (2) investment grade.” – Christine Benz, Chief Economist of Valuewalk Most investment professionals would disagree with the statement that institutional investors don’t suffer losses the same as retail investors. But in reality, the percentage of institutional investors who can lose their principal is much less than that of retail investors, which is certainly important to note.
Why does this matter?
If you want the highest return possible, which typically means you need to take on greater risk, you should focus more on your overall investment strategy and not worry so much about the composition of your portfolio. But you also need to recognize that an equity investor who uses a “fear of missing out” strategy and who is only in equities could end up with a portfolio that looks a lot different than an equity investor who has a very balanced approach and the balance of risk in the portfolio is almost perfectly equal to the amount of risk being taken. The point is that different types of investors have different preferences when it comes to risk, return and other factors.
As investors, we always want to find the best investment for our life savings. These funds can be sold easily after a certain period of time, ensuring the greatest stability of the future. By doing this, we can ensure that we are getting good investment returns with minimal risk. My goal with this article is to introduce you to the best options in the global equity markets. Of course, we don’t invest for our own personal benefit. We want to invest for our life savings, so we can provide for our future family.