Institutional and retail investors are similar in terms of their goal of maximizing returns on their investments – but that’s where the similarities end.
Institutional investors
An institutional investor is a professional who trades in large groupings of securities on behalf of an individual or shareholder. Since they manage massive volumes of capital, their trading activity influences market supply, demand and prices. Players like BlackRock hold major shares in many public companies and have the ability to exercise voting rights to influence corporate governance and management decisions.
Institutional investors control the larger portion of financial markets. In Canada, their investments account for $4.5 trillion in assets under management. In the United States, institutional investors hold about 80 per cent of total market capitalization of major U.S. indexes.
Types of institutional investors
- Pension funds: These are employer or state-sponsored plans that pool employee contributions to pay out retirement benefits.
- Insurance companies: They pool premiums from policyholders and invest them into markets.
- Endowments and foundations: Long-term pools of capital through universities, hospitals or charities that utilize the capital to support ongoing operational and philanthropic goals.
- Family offices: Private, dedicated wealth management firms that handle investments and needs of ultra high net worth individuals/families.
- Mutual funds: Pooled investment vehicles that collect money from smaller investors to purchase a diverse portfolio of securities.
- Hedge funds: Private investment partnerships that pool capital from institutional and accredited investors to generate returns using complex strategies.
- Private equity and venture capital: These funds raise capital from institutions and high net worth individuals to invest directly into private companies or buy out businesses to increase their value.
- Commercial and central banks: They invest their own excess capital and manage trust accounts on behalf of their clients.
Retail investors
A retail investor is an individual who invests their own money. They tend to invest for personal wealth-building or retirement, in a plan such as an RRSP. Retail investors manage their personal funds using (discount) brokerages or apps such as Wealthsimple.
The typical retail investor doesn’t act in the way a traditional “trader” would. They invest at lower frequencies and volumes with their own capital. One may take on the “buy and hold” approach through passive funds, or choose to actively trade to capture market trends.
Since retail investors are not considered professionals, they are protected by regulatory bodies to prevent fraud and work to ensure fair market practices.
Differences between institutional and retail investors
| Institutional | Retail | |
| Capital source | Pooled capital from a variety of sources – shareholders, clients, organizations, etc. | Personal savings and wealth |
| Volume and frequency | Enormous trade volume, highly active, and tends to be automated | Lower volume, trading less frequently |
| Market influence | High capacity to drive, set and shift market prices | Minimal impact on overall market prices |
| Resources | Teams of analysts, along with data and complex models | Has to rely on public information and personal research |
| Fees and costs | Benefit from negotiation power, so they have lower fees | Pays higher commission costs and management fees per trade |
| Strategy and goals | Data-driven, focused on absolute returns and regulated by the SEC | Driven by personal milestones (e.g. retirement) and are highly flexible |
| Regulatory | High burden | High privacy, no public disclosure is required as an individual |
| Asset class access | Full access to private credit, direct infrastructure, venture capital and pre-IPO placements | Restricted mostly to public equities, ETFs, mutual funds and fractional assets |
| Execution | Dark pools and algorithmic trading to avoid spiking prices | Public exchanges or retail apps |
Information asymmetry and market liquidity
There is an imbalance between the two investor groups based on their respective access to market data, data, resources and speed of execution.
The institutional players dominate because of their huge flows of capital, research teams and ability to access corporate executives, whereas retail investors have to rely on public and delayed information.
Retail trades execute trades of smaller volumes with little to no price impact, allowing them to access different and more niche assets. Given the size of trades that institutional investors execute, they have to find workarounds to avoid moving prices.
Trends
Retail investors are becoming an increasingly influential driving force behind market activity. Everyday individuals have been able to fuel rallies, while participating in dips and IPOs.
Unlike the meme stock craze, recent retail flows are targeting profitable companies and sectors. They have contributed to an increase in market swings, since individuals have been slowly destabilizing prices, especially during times of macro stress.
