Retail investors are small scale investors or in other words they are not professional and don’t have much knowledge about investing. Such investors are also called individual investors. They normally trade and transact in bonds, equities, MFs and ETFs. They have to reach brokerage firms or online trading portals or discount brokers for performing transactions. Their motive to undergo such transactions is earning a bit of extra money. They do not take this source as permanent income. It is just a passive income stream, for them.
On the other hand Institutional investors are giant investors with deep pockets. They gather a pool of money sometimes from retail investors as well and from that pool they take investment decisions on behalf of the entire investor class who gave away their money. Thus institutional investors have deep pockets and they perform transactions in huge quantities. Sometimes they also involve investments but generally these firms do a lot of trading activities as well. They transact in multiples of 10000 shares and more. Institutional investors trade in every security possible. Some of them also buy controlling interests in firms so that they can have control over business strategies of the firm.
Hence institutional investors are really giant investors while retail investors are individual or local investors with small amounts in transactions.
Advantages of Retail Investors
The retail investors follow the investing strategies length. They invest their savings into one stock and then forget it and think long term. They depend on dividend income and believe in earning through long term investing. Retail investors stay on the position until they achieve near to 8% gains from their investments around the quarter or nearly 9 to 10% interest in a year.
They can take a hit from short term market corrections ads they have paid for the shares and own them. Retail investors trade less into future and options and hence involve into long term trading. Also retail investors are investing on their own with their own money while institutional investors are investing people’s money. If they fail to generate constant returns people would demand their money back and they may go out of business.
They believe in taking small steps. If X share is good for long term, they will accumulate such stock at intervals when they have the money required for the same. This means that the retail investors don’t have much risk gathered at one point of time. They can invest into multiple companies as they have small amounts of investments. Hence retail investors can create a diversified portfolio and hold onto it till they get adequate returns.
Retail investors have no impact on the market movements as they trade in smaller quantities. Also they have less money invested and being the individual investors they can liquidate their investments whenever required. Also they are not required to have a diversified portfolio which is mandatory for many investor classes as they trade in small quantities with their own money. Hence they have liquid investment and can liquidate investments whenever required as they don’t affect the market trend.
Advantages of Institutional Investors
Cheap Commissions possible
As institutional investors transact in larger quantities they have the negotiating power with the portal holders. They can negotiate for their fees charged for trading. The portals don’t want to lose such a large quantity of trades hence they negotiate the fees and price the institutional investors with the best deals so that the business continues between the parties.
The institutional investors have the money power. They buy and sell securities in large quantities which affects the market trend as well sometimes. On the other hand they have a large capital so they can take a hit for a while in valuations. The credit line is very thin and the risk profile should be kept low so they trade very frequently to generate more income from transactions. Hence They believe in quantity over investing. They involve bulk deleting and not small scale raiding. Also sometimes they directly deal with larger stockholders of a firm and do overnight trades. All this happens due to their deep pockets and larger quantity trades.
There are many high return securities which are not available to every investor class. Institutional investors have access to all the securities as they have large quantities for buying and selling. The best example for such security is IPO or Right Issues. The institutional investors are given a chance before the launch of IPO to invest in them and book a share of the company upfront. Hence institutional investors have the upper hand than the retail investors in such cases.
Expertise and Experienced Team
The institutional investors have a diversified team who analyses the securities and take investing decisions based on the outcomes of statistical analysis. They have expert teams looking after various schemes and hence they can generate stable income streams from the market. The market is uncertain but they can predict the market flow. Hence they are professionals in the field and transact based on actual data and facts. They also have the privilege of having information early before it hits the market.
Difference Between Retail Investors and Institutional Investors
|Retail Investors||Institutional Investors|
|Money power||They have less money available in comparison to institutional investors.||Institutional investors gather a pool of money from various people. So they have deeper pockets than retail investors.|
|Fees||They are charged more fees because of less quantity.||They are charged less fees and have the negotiation power for the commissions and fees.|
|Security class||They don’t have access to all the security classes.||They have access to all the security classes.|
|Skills||They don’t have the skills or have less skills in comparison to institutional investors.||They are professionals in the field and have expert teams as well investing on behalf of the investors.|
|Strategy||Retail investors prefer investing over trading.||Institutional investors prefer trading more over investing. They also get involved in investing.|
|Investment size||Retail investors have less quantity to trade. They trade in intervals and not daily.||Institutional investors have high quantities to trade and they do it very often.|
|Effects on market||Their transactions have less impact on the market trend. The reason is their low quantity of trade.||They have a major impact on market trading. They trade in multiple of 10000 shares and more and hence they have an impact in the trend of the market.|
Types of Institutional Investors
There are many types of institutional investors. Major Institutional investors are :
Hedge funds – They are privately held mutual funds which have no regulation form SEBI. Minimum limit is 20 crore Rs. for getting qualified as a Hedge fund.
Banks – Banks have huge capital with them and have a good customer base. They use both these factors and indulge into investing by setting up their own investing firm.
Mutual funds – They are regulated under rules of SEBI and work similarly as hedge funds. The difference is they have some rules to follow and maintain the risk profile. Also they have to disclose investment decisions and their company information.
Pension fund management companies – They are employee fund driven investing companies. The fund that employees give is also known as provident funds.