Sunday, 5 December 2021

Difference Between Institutional Investor And Retail Investor

Non-professional individuals who make investments are referred to as retail investors. They usually make investments in securities, bonds, stocks, mutual funds, and exchange traded funds (ETFs). The investment that they make can be direct or via finance professionals like brokerage firms, investment managers, financial advisors, etc. Retail investors are mostly driven to make investments for the reasons of increasing their wealth and having financial security in the future.

Advantages of being a retail investor

  • They can be in the stock market for the long run, thus avoiding short-term risks
  • They can make small, easy investments
  • They can have a diversified portfolio and have a mix of safe and high-risk securities
  • Less paperwork

Disadvantages of being a retail investor

  • There is a certain amount of fees involved while making investments
  • Tax is implemented on income earned through investments
  • No bulk buying, hence they pay a higher price for a stock

Institutional Investors, on the other hand, are entities that take responsibility for investment and investment-related decisions on behalf of their shareholders. Institutional investors usually make an investment in a large chunk of shares at the same time (10,000 or more). They also have a very large stake in companies since they tend to buy the majority of the shares altogether. So, the volume of the shares rises, and they own a large percentage of big companies.

Mainly, there are six types of institutional investors:

  1. Pension funds: These act as an investment plan created for paying employees upon their retirement.
  2. Hedge funds: These are a large number of shares not available to individual investors. The main aim of hedge funds is to do away with the losses of other stocks.
  3. Mutual funds: These consist of a portfolio of securities, and one is not limited to any one particular stock. Mutual fund investment is a good option to minimise risk.
  4. Insurance companies: They collect money in the form of insurance premiums and invest in stable securities and limited risky securities.
  5. Banks: Banks aid the corporates with funding and giving access to the capital market.
  6. Endowment funds: These are funds that are received from grants, charitable donations, etc., and are then used for investment.

Advantages of being an institutional investor

  • Better negotiation on fee as they buy shares in bulk
  • Access to securities that are not available to other investors
  • More power as they buy shares in bulk and have more monetary resources

Disadvantages of being an institutional investor

  • Low turnover on stocks as they take a great deal of time and money prior to investment decisions.
  • Pressure of Institutional Owner Selling always surrounds as they own thousands, sometimes even millions of shares and the selloff tends to impact the individual investors

Retail investors and institutional investors both have their advantages and disadvantages. You can choose how you want to invest depending on the stock market today. People who want to stay independent in decision-making can go for retail investment while people who want to be part of a group investment can go in for institutional investment.

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