Institutional investors & retail investors and how they differ

For the most part, we can split the types of investors we see in the markets into two groups: retail investors and institutional investors. The differences between these inverter types are significant, not just for the investors themselves but for the markets that they are investing in as well. Let’s take a closer look at what each of these types of investors entail and how they differ. 

Institutional investors – the big fish

When you look at some of the biggest players in the world of trading and investing, they are always the institutional investors. These institutional investors are the ones who are really throwing their capital weight around. An institutional investor isn’t just one entity though but rather, many different forms. Institutional investors can include things like pension funds, mutual funds, money managers, investment banks, hedge funds, private equity investors and more. 

Institutional investors make up more than 85% of trades on the NYSE (New York Stock Exchange) right now. Essentially, these institutional investors pool money for individual investors or organizations. Due to this pool of capital, institutional investors are able to invest far greater numbers than your average individual investors. Institutional investors have a much larger impact on the market than individual investors as they are typically executing sizable block trades. 

Individual investors or organizations will opt to use the services of these institutional investors because they have in-depth knowledge and experience of the markets. Aside from that, these institutional investors will often have access to information and data for their investments that your individual investor simply does not. More so than that, they have the capital to further invest in research tools. 

Apart from knowledge and capital, these institutional investors have access to funds and investments that individuals do not. These funds will often have very large minimum buy-ins. The major benefit of using these institutional investors also lies in the fact that they can negotiate for much lower trading fees. This is often due to the sheer volume of their block trades and their connections within the markets that allow them to access better terms for their trades. 

These connections and the overall experience that institutional investors possess also allow them to operate under different SEC (Securities and Exchange Commission) regulations as well. 

Retail investors – the individuals

Where institutional investors are investing and trading on behalf of individuals and organizations, the individual investors will invest for their own benefit and profit alone. A retail investor or individual investor will typically invest their own capital with online brokers, mutual funds or banks. 

For the most part, retail investors will invest much, much smaller amounts into the market and generally with a position that stays open for longer. This requires them to manage their own money and invest time into making informed decisions on their positions. 

As these retail investors are investing their own money, often for long term financial plans like a retirement or college fund, they are prone to making more emotional investment decisions. Coupled with the fact that they are far less experienced and knowledgeable than your institutional investors, this can lead to poor trading practices. These retail traders have far less purchasing power than institutional investors which leads to them having to pay for more commission fees and other related fees to their smaller trades. 

With that being said, the SEC actually does a good job of protecting retail investors from themselves. The SEC does not consider retail investors to be all that knowledgeable (for the most part) when it comes to the public markets. As such, they will actually bar these retail investors from accessing trades they feel are far too complex and risky. 

The main differences between these investor types

With the previous two sections in mind, you can start to understand some of the more significant differences between retail and institutional investors. We have touched on some additional key differences between the two below. 

Volume and access

As we have already seen, the difference in spending power between your average retail investor and institutional investor is massive. This is due to the fact that institutional investors invest for individuals and organizations who pool their money with the institutional investors. This gives these investors far greater access to capital for larger scale block trading. Your average retail investor simply cannot match that kind of financial muscle. 

While more capital means larger volume trades, it doesn’t always mean that the institutional investors have the upper hand in every department. In fact, because these institutional investors need to trade on larger scales, they will often forgo still attractive smaller stocks because it doesn’t provide enough of a profitable outcome for their firms. This is where retail investors can find their niche with smaller volume and smaller investments that still lead to profitable gains. 

Knowledge and experience

A clear difference between the institutional investors and retail investors is the overall knowledge and experience of the markets. Institutional investors have access to greater resources and therefore can invest more into detailed research of certain stocks and markets which in turn lead to more informed investment decisions. Retail investors have certainly been closing the gap in recent years but there is still a significant gap in information access between the two investor types. 


Retail investors will unfortunately have to deal with a number of fees, especially when executing a number of smaller trades. These trades are subject to a number of fees that include things like commission fees, marketing commissions and other fees. Institutional investors have access to higher minimum buy-in trades which in turn allow them to access better fee structures for their larger block trades. 

Emotional temperament

As we mentioned earlier, emotional temperament plays a big role in retail investing. An individual investor will already feel the pinch of nerves when investing because they are using their own capital for the investment. On top of that, these retail investors may be investing in long term financial plans like their retirement or their children’s college education. The stress of making real world trades with your own money can lead you to make emotional trading decisions. Whether that be by making overly risky trades or not taking enough risk for fear of losing your money. 

The institutional investors do not possess this same problem. While these investment firms and institutions are naturally trying to do the best job possible, they are not investing their own money. They can then use their superior knowledge of investing and the markets to make unemotional trading decisions. This will more often than not lead to smarter trades that bear the right amount of risk. 

Market impact

Retail investors will typically make much smaller trades which in turn will have little to no impact on the markets they are actually investing in. The number of individuals you would need to trade in a certain market to see any actual impact on the price point would need to be incredibly large. 

This is not the case with the bigger institutional investors. As they are regularly executing very large block trades on the public markets, they can often impact the markets themselves. While most of these institutional investors will attempt to limit their impact on the markets, sometimes there is simply no way around it.


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