INSTITUTIONAL VS. RETAIL INVESTORS:
DIFFERENCES AND OVERVIEW

The fast-paced financial industry sees the movement of trillions of dollars around the globe on an almost daily basis. These vast movements of money are a primary driver of the overall economy, affecting the fortunes of companies, countries, and individuals.

But who are the driving forces behind these movements of capital? The answer, of course, is investors. But what is an investor? Broadly speaking, there are two main types of investors in the world: retail investors and institutional investors. Yet, what is an institutional investor, and what is a retail investor?  Institutional investor describes some of the largest corporations in the world, such as hedge funds, insurance companies, banks, and pension funds.

These are often multibillion-dollar entities that use other people’s money to make investments and increase overall AUM, revenue, and profits. When nailing down the meaning of institutional investor, you might think of the financial titans on Wall Street or the City of London, for instance.

On the other side of the coin are non-institutional, or retail investors. But what is a retail investor?  Retail investor describes an individual investor who uses their own money to buy and sell securities, with the aim of meeting personal financial goals.

This is the key difference between retail and non-retail investors; the former uses their own money and often requires the services of a broker platform (such as eToro) to make investments and trades on the global market.

A retail investor could be someone shorting GameStop stock, or it could be someone investing steadily in ETFs as part of their retirement plan. When comparing retail vs institutional investors, some key differences stand out:

• Institutional investors are tasked with investing other people’s money.
• Institutional investors are the giants of the financial industry, with their activities constituting the vast majority of all transactions on major stock indices.
• Institutional investors trade and invest in such massive quantities that they receive special privileges and treatment, such as much lower fees per transaction.
• Retail investors are individuals using their own money to invest, for the sake of their own personal financial goals (this is the non-institutional definition).
• Retail investors must use a broker who can provide them access to the market, sometimes in exchange for fees or commission.
• Retail investors use their own resources and knowledge to build a trading and investment strategy, while institutional investors may have thousands of employees and access to vast pools of data and sophisticated analysis tools.

When comparing institutional vs retail investors, these are the most important things to keep in mind.

What Are Institutional Investors?

So, what is an institutional investor in practice, and why are institutional investors important? In a nutshell, institutional investors are organisations consisting of experts, who control vast sums of money and are tasked with using their expertise and resources to grow that wealth on behalf of others.

This is where the institutional clients definition can come in handy. If you have a pension plan such as a 401K or any kind of insurance or mutual fund, then you have already benefitted from the expertise of institutional investors.

They are usually staffed with highly educated and qualified individuals whose sole responsibility is to move massive sums of money around and invest them strategically. They are the movers and shakers in financial markets, responsible for more than 85% of all activity on major indices such as the New York Stock Exchange.

When you look at any news developments coming from financial markets, you are nearly always looking at institutional investor news, since retail investors rarely have a significant impact on markets as a whole.

Rare exceptions to this rule include the GameStop Short Squeeze of 2021 and the rise of Bitcoin, both of which have been driven to a large extent by individual investors such as yourself.

Let’s look at some examples of institutional investors to better illustrate what they are and why they matter so much.

Types of Institutional Investors

Exchange-Traded Funds (ETFs)

An ETF is actually a financial product, rather than a type of investor. However, it is a product that tracks the price of various securities and commodities such as stocks and bonds and is typically managed by different types of institutional investors.

Index Funds

When looking at financial institutional investors, index funds will come up a lot. Warren Buffett  is one of the best-known proponents of index funds, which he describes as the “safest haven” for institutional and retail investors alike. They are managed funds that track the performance of stock indices, such as the NASDAQ or the S&P500. Their value grows as the stock market grows, meaning that, although returns are modest, they nearly always appreciate over time.

Mutual Funds

Mutual funds can be described as retail institutional investors, as they are investment programs that are funded entirely by shareholders. These funds are typically international institutional investors which trade in highly diversified holdings and are managed by a team of qualified professionals.

Hedge Funds

A hedge fund is a professionally managed investment fund that trades in a variety of liquid assets on behalf of investors. Hedge funds use complex trading methods and risk management strategies to grow, including short selling and derivatives.

Pension Funds

This is one of the most important types of institutional investors. Pension funds are the pooled funds that pay out your pension in retirement. Throughout your working life, your pension fund will be professionally managed by expert fund managers, who invest your money in stocks and bonds as a means of growing the pension pool.

Insurance Companies

Insurance companies are some of the biggest players in the financial markets today. They invest customer premiums in a wide range of assets (but mainly in bonds) to increase revenues and reinvest them.

Commercial Banks

You might be wondering, are banks institutional investors? The answer is, most of the time, yes. Banks invest money from deposits and from shareholders to diversify holdings and grow, shifting the wealth onto balance sheet assets.

What Are Retail Investors? 

So, what exactly is a retail investor? Retail investors are simply any investor who is acting as an individual, rather than as part of an institution. To define retail investors, you just have to think of anyone who buys stocks, commodities, real estate, bonds, or any other type of asset with their own money.

A key component of the retail investor definition is that they nearly always have to use some kind of middleman, since they do not have direct market access. This might be a brokerage service such as eToro, or a realtor or wealth manager.

When looking at why retail investors lose money, the answer is often because their own personal funds that they have invested in an asset decrease or are lost as a result of that asset depreciating.

Although retail investors do not make up as big a share of the overall market as institutional investors, they still have an important role to play in the overall economy. Let’s look at some examples of retail investors to better understand their importancein the wider market.

Types of Retail Investors

Stock Traders

Retail investors in stock market activity have an important role to play and can often determine overall price trends by sheer force of numbers. Most retail investors use platforms such as eToro as a broker, allowing them to purchase stocks or CFDs in stocks in order to capitalise on price trends.

But can retail investors short stocks? The answer is, mostly yes. There are some regulatory limits on shorting, but for the most part, retail investors can use financial instruments such as CFDs to take a short position against any asset they like.

Bond Buyers

So, can retail investors buy bonds? In fact, retail investors are actively encouraged to buy bonds, especially if they are government bonds. When you buy government bonds such as US Treasury Bills, you are essentially loaning the government money for a fixed period of time, which the government agrees to pay interest on in return.

But how can retail investors buy bonds? You can use a qualified brokerage platform, or you can buy bonds directly through government-affiliated services such as Treasury Direct.

Cryptocurrency Traders

If you have been following the news from the markets at all in the past few years, you will already be well aware of cryptocurrency trading. Cryptocurrency trading involves the buying, selling, and speculating of blockchain-based e-currencies such as Bitcoin, Ethereum, or Dogecoin.

They have no underlying value and are not pegged to anything, with their price being determined entirely by market sentiment. Cryptocurrencies are very, very volatile assets. Some retail investors have become overnight millionaires from crypto trading, while others have lost everything.

You might also be wondering whether retail investors can invest in private equity, or  buy corporate bonds? The answer is yes, as long as you have the right broker at your disposal. This is where eToro can help.

Comparison Between Retail and Institutional Investors

Now that you know the meaning of institutional and retail investors, let’s do a quick comparison of the key differences between the two.

Institutional Investors	Retail Investors
Invest and manage money on behalf of others.	Invest their own money.
Invest and trade huge volumes of money , often in the billions of dollars.	Invest and trade small amounts of money.
Have a significant impact on the direction of the market.	Individually, have a minor impact on the overall direction of the market.
Offered very low brokerage and commission fees due to their outsized role in the market.	Typically charged higher fees and commissions per trade.
Have access to any and all information on the market.	Have access to a more limited range of retail only data.
Highly knowledgeable with large teams of qualified financial experts making decisions.	Dependent on individual knowledge and resources to make investing decisions.
Invest and trade to increase wealth, AUM, and profits on an organisational level.	Invest and trade to meet personal financial goals.
Trade very, very frequently, with hundreds or thousands of transactions taking place in a single day.	Trade much less frequently, usually a few trades a day at the most.
Activity is highly regulated and supervised by authorities.	Regulations and legislation exist mostly to protect retail investors.

Impact of Institutional Investors

So, why are institutional investors important? As mentioned earlier, their importance comes from their sheer size and wealth. Given that institutional investors can purchase shares or commodities in such massive quantities, they can dictate market sentiment to a very significant degree and are uniquely responsible for price movements.

If one or two large institutional investors started piling into gold or Apple stock, this would be sufficient to send the prices of these assets up. When assessing why institutional investors are important in today’s business world, one should also look at their value to retail investors such as yourself.

Savvy retail investors can follow the actions of institutional investors to learn more about the market, or even copy their trades outright as a means of matching their success. You can do your own research, for example, by looking through SEC (Securities and Exchange Commission) filings in the US, or Companies House data in the UK, to get a closer look at the big moves being made by institutional investors right now.

By tracking the market and investing where the institutional investors are putting their money, many retail investors can construct a resilient and profitable trading strategy.

Getting Started as a Retail Investor 

So, how can UK retail investors get started? No matter what your experience level is, you can start using eToro today to buy and sell a wide range of financial assets on the global market.

You can use our detailed stock investment tools to buy and sell shares in some of the most well-known and profitable companies on the planet, such as Apple, Google, Tesla, and Amazon. You can also use our range of tools and indicators to get in-depth insights on the direction of the market, to help you make informed decisions on the stocks you wish to trade.

You can also take the longer approach, using eToro to invest in ETFs and index funds to help you save and grow your wealth over time. On our platform, you can also find a wealth of financial news and resources to help you choose the right vehicles for your investment.

For a little more diversity, you might want to start investing in cryptocurrencies on eToro, using our crypto platform to open positions on Bitcoin, Ethereum, Litecoin, and more.

In addition, you can also bet against an asset using our range of CFDs, which allow you to short sell stocks, commodities, crypto, and more. Retail investors in the UK can sign up to eToro today and get started with commission-free trading.

Summary

In summary, here is what we have covered:

• Institutional investors play a dominant role in market activity and can influence price trends with their activities.
• Retail investors can invest in just about any asset or security, just like institutions.
• Retail investors can use brokerage services such as eToro to begin trading and investing without having to pay any commission.
• Routine and universal activity such as participation in a pension plan or mutual fund makes you a beneficiary of institutional investors.
• Retail investors can follow the activities of institutions to inform their own trading strategies.