Blog Invest Institutional Vs Retail Investors: What’s The Difference?

Institutional Vs Retail Investors: What’s The Difference?

date September 15, 2021 time 6 min read 938 views

One of our missions here at MyConstant is to demystify the financial world, and strip away the jargon so that you can understand what’s going on. In this post, we will be talking about the difference between institutional and retail investors and why this is important.

A quick look at the basics

An investment is an asset acquired with the goal of generating income from its profit or the increase in the value of the asset over a period of time. An investor is a person or organization that puts money into financial schemes with the expectation of receiving financial returns. 

There are two types of investors, institutional investors and retail investors

A clear understanding of the types of investors, and defining where you stand, can be invaluable in your financial decision-making. It will help you identify the right investment products, the best strategy, and to manage your resources efficiently.

Institutional investors

Institutional investors are organizations that invest money on behalf of their clients or members in large volumes. Some examples of institutional investors are mutual funds, hedge funds, pension funds, endowment funds, and large asset managers.

There's no need for you to rely on institutional investors in the digital era.
There’s no need for you to rely on institutional investors in the digital era. (Source: Pixabay)

These organizations have the ability and resources to use complex investment products in order to meet their clients’ goals. They also traditionally have preferential treatment in terms of access and lower fees, due to the large scale nature of their investments.

Examples of institutional investors include:

  • Investment banks
  • Wealth management funds
  • Mutual funds
  • Hedge funds
  • Insurance companies

It goes without saying these types of companies have a huge amount of resources and power. Decisions made by these institutions can have a significant impact on the movement of financial markets.

Retail investors

Retail investors are individual investors who invest money in their own accounts through directly or through brokerage firms. It is likely that you would fit into this category, typically investing smaller amounts than institutional investors. 

As a retail investor, you could undergo the process entirely on your own or hire professional financial advisors to oversee your investments.

You can now control your own investments in the palm of your hand.
You can now control your own investments in the palm of your hand. (Source: Pixabay)

Your aim is to meet personal goals, like financing large purchases, building retirement savings, funding a college education, or merely accumulating wealth over time.

Examples of retail investors are:

  • Individual angel investors providing financial backing for small start-ups
  • Sweat equity investors who receive shares from their companies in exchange for their time and labor
  • Individuals investing in stocks, bonds, retirement accounts, cryptocurrency, and peer-to-peer lending others.

Silver lining for retail investors

Institutional investors have traditionally enjoyed unfettered access to asset classes, IPOs, trading strategies, and geographic markets. New technologies and platforms are giving retail investors access to assets such as real estate, commodities, and investing strategies. Many of these investment opportunities would have been formerly unavailable to small investors before the digital era.

Due to their large and frequent trades – accounting for over 85% of New York Stock Exchange transactions – institutional investors pay lower fees. While retail investors often have to pay higher fees on their trades, as well as marketing, commission, and other related fees. However, some online trading platforms now offer lower fees to retail investors.

In order to protect the interest of retail investors, the SEC imposes strict rules on the entities that work with them. These rules include assessment of risks, fee disclosures, and safeguarding of client assets.

Learning about how institutional investors trade can help you understand how the safeguards put in place by the SEC mitigate risk. Some of the forces that drive your investments, and when to profit directly from institutional investments through mutual funds or REITs with holdings usually reserved for institutions.

Where should retail investors start?

Now that you have a clear understanding of the two types of investors, the factors that differentiate them, and why knowledge of how they work is essential, it’s time to take your first steps into the rewarding and exciting world of investment.

As you embark on this journey with the plethora of information available at your disposal, the key is to understand you have the power. Retail investors have more options than ever, but also more pitfalls.

Before making your first investment, you must identify your financial goals, assess your risk tolerance, and research the right platform for you.

Identify your financial goals

Financial goals are the big-picture objectives that you want your money to cover at a specific time. Without financial goals tied to your investment, you’re likely to invest less, lose focus, and make irrational decisions.

Buying a home is a common goal for retail investors.
Buying a home is a common goal for retail investors. (Source: Pixabay)

Bearing in mind that your investment is a tool you use to accomplish your financial goals, it’s important that you identify your goals early and let them guide your investment decisions.

Whether your goal is to finance a large purchase, fund your child’s college education, or grow your retirement savings, it will help you determine the your investment strategy. There are other elements to consider too 

Assess your risk tolerance

When it comes to investing, risk and reward go hand in hand – all investments involve some degree of risk. This is why it’s important that to have a strong financial foundation and do your research before making any decisions. You might decide to pursue an aggressive strategy, though if you are a new investor, we’d suggest you take a conservative approach first.

Aggressive investors are willing to risk losing money to get potentially better results in the long run. While conservative investors favor investments that involve low risks with corresponding low interest rates.

You should assess your risk tolerance and ensure you make informed investment decisions. Remember, the key to building wealth is to accept risk as a fact of life and invest wisely.

Research the right platform for you

Once you’ve identified your financial goals and assessed your risk tolerance, the next step is to choose the right investment platform for you. 

Investment platforms act as a place to buy, sell, and hold all your investments. With so many platforms to choose from, you need to carefully consider the following before choosing one to stick with:

  • Fees: How do the fees compare? Some platforms have management fees of up to 3%, while others charge you for matching with lenders. Take an in-depth look at their fee structure. If it’s too good to be true, it probably is.
  • Investment options: Is your preferred investment option available? There’s a wide range of investment options to choose from such as lending your money online or earning interest on crypto, but most platforms don’t offer them all. Once you’ve decided which investments you’re interested in, choose a platform that offers those options.
  • Support: Do they offer helpful resources? The journey of a retail investor is one of constant self-education. You will need to learn certain investment strategies and options as you progress. Choose a platform that’s committed to providing resources, like blog posts and webinars, to help you access the right information.
  • Customer service: Do they offer 24 hour customer service? Quality customer service can make a difference in your experience, especially when issues arise. Read customer reviews to know the experience of other investors with the support available.
  • Features and user experience: Is it easy to navigate, and does it have the features you need to manage your investments? Some platforms are catered towards experienced investors and may be more difficult to use for new investors. Review the platform to ensure it’s suited to your experience level and knowledge before you commit to it. 

Considering these factors when choosing the right investment platform for you will help you make informed decisions. Investing is a personal decision that is based on your unique personal financial situation, the platforms your friends use may end up not being the right platform for you.

A clear understanding of the types of investors, combined with the proper investment preparation and platform, can help you find and take advantage of the right investment opportunity for you.

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