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Institutional vs Retail Investors: What's the Difference?

October 29, 2020 · 6 minute read

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Institutional vs Retail Investors: What's the Difference?

The stock market is a quickly changing terrain—home to daily dips and rapid rises, economic ebbs and financial flows. And, with something as volatile as the stock market, there’s no single roadmap that all investors want to follow. In fact, there’s not even one kind of investor.

For instance, many people new to the investing world don’t realize that there are two main kinds of investors participating in the marketplace—namely, institutional and retail investors.

Much of the trading on Wall Street is done by institutional investors, companies or organizations that put money in the markets on the behalf of other people, or trade investments at a large quantity.

This first investor category is dominated by professional financial institutions, while the latter one is made up—largely—of non-professional individuals. Confusingly, individual investors are called retail investors. (No, this doesn’t mean they need to run a brick-and-mortar store).

Instead, “retail investor” is one label used to describe someone who invests with their Individual Retirement Account (aka IRA) or who trades on their own through a brokerage account.

Below is an overview of the major differences between institutional vs. retail investors, including an explanation of individuals investing on their own or having someone build an investment portfolio on their behalf.

Who is Considered a Retail Investor?

Simply stated, retail investors are non-professional investors. They’re not a Wall Street trader working with a multi-billion dollar fund. In the US, it’s quite common to be a retail investor.

According to a 2016 Pew study , 52% of American families have some level of investment in the stock market with 88% of households earning more than $100,000 owning stocks. Examples of retail investors include people who manage their retirement accounts online (e.g., an IRA) and those who trade stocks as a hobby.

Any non-professional investor buying and selling securities, such as stocks, or investments like mutual funds and exchange traded funds (ETFs) through an online or traditional brokerage or other type of account is considered a retail investor. So, in this case, the term “retail” generally refers to an individual trading on behalf of themselves, not on the behalf of a larger pool of investors. Retail here references the purchase and selling of stocks in relatively small quantities (as opposed to institutional traders).

Because individual investors are generally thought to be more prone to erratic behavior than their professional counterparts (and often don’t have direct access to the resources and research of larger institutions), they’re generally considered a higher risk. So, the Security Exchange Commission (SEC) provides specific protections to retail investors.

For example, the 2019 Regulation Best Interest rule states that broker-dealers are required to act in the best interest of a retail customer when making a recommendation of a securities transaction or investment strategy.

This federal rule is intended to ensure that broker-dealers aren’t allowed to prioritize their own financial interests at the expense of the customer.

Another protection is that investment advisors and broker-dealers must provide a relationship summary that covers services, fees, costs, conflicts of interest, legal standards of conduct, and more to new clients.

Who is Classified as an Institutional Investor?

Now, by comparison, institutional investors make investment decisions on behalf of individual investors or shareholders. In general, institutional investors trade in large quantities, such as 10,000 shares or more at a time.

This large-scale breed of investing often has access to investments not available to retail investors. By virtue of their being part of a larger institution, this type of investor also may have a larger pool of capital to buy, trade and sell with.

Institutional investors are responsible for most of the trading that happens on the market. Examples of institutional investors include commercial banks, pension funds, mutual funds, hedge funds, endowments, insurance companies, and real estate investment trusts (REIT). The most common institutional investors are listed below:

Types of Institutional Investors

1. Commercial Banks

One of the most self-explanatory of the list, commercial banks are the common banks many people are familiar with, such as Wells Fargo, Citibank, JP Morgan Chase, and Bank of America. Along with providing retail banking services, such as savings accounts and checking accounts, large banks are also institutional investors.

These large corporations have entire teams dedicated to investing. For example, Bank of America Merrill Lynch has an entire team dedicated just to global investing research and Wells Fargo Securities provides a suite of capital markets and advisory solutions.

2. Endowment Funds

Typically connected with universities and higher education, endowment funds are an investment fund created, for the most part, by a nonprofit organization. Churches, hospitals, nonprofits, and universities generally vaunt endowment funds, whose funds often derive from donations.

Endowment funds usually have a restriction on how the investment works and generally have an investment policy that dictates some of the investment strategy for the manager to follow, such as how aggressive to be when trying to meet return goals and what type of investments are allowed.

Another component is how withdrawals can work; often, the principal amount invested stays intact while investment income is used for operational or new constructions, but the exact details will be communicated in the withdrawal policy and the usage policy.

3. Pension Funds

Pension funds encapsulate two entities—including, 1) the more common defined contribution plans, such as 401(k)s or 403(b)s, and 2) defined benefit pensions, when a retiree receives the same amount of money regardless of how the fund does.

Careers that offer defined benefit pensions are much less common in the US. Where they do exist, such careers are often linked to labor unions or the public sector. For example, a public school teachers union or the auto workers union.

Public pension funds follow the laws defined by state constitutions. Private pension plans are subject to the Employee Retirement Income Security Act of 1974 (ERISA); this act defines the legal rights of plan participants. As for how a pension invests, it depends.

ERISA does not define how private plans invest other than requiring that the plan sponsors are fiduciaries. Public plans and private plans typically depend on self-defined mandates that outline projected rate of return and asset mix.

4. Mutual Funds

As defined by the Securities and Exchange Committee (SEC), mutual funds are companies that pool money from many investors and invest in securities such as bonds, stocks, and short-term debt. Mutual funds are known for offering diversification, professional management, affordability, and liquidity.

Typical mutual fund offerings include money market funds, bond funds, stock funds, and target date funds.
The last category here is often designed for those planning for retirement. The asset mix of these target date funds, often known as lifecycle funds, shifts as time progresses to match the retirement timeline of its investors.

Some funds offer dividend payments, which are paid to shareholders or automatically reinvested, depending on the investor’s preference.

5. Hedge Funds

Like mutual funds, hedge funds pool money from investors and place it into securities and other investments. The difference between these two types of funds is that hedge funds aren’t as regulated as mutual funds.

Because hedge funds use strategies and investments that chase higher returns, they also carry a greater risk of losses—they’re sometimes called high-risk funds. In general, hedge funds have higher fees and higher risks. So, they tend to be more popular with wealthier investors and other institutional investors. (In some cases, they’re only available to accredited investors ).

6. Insurance Companies

Perhaps surprisingly, insurance companies can also be institutional investors. They might offer products such as annuities, fixed, variable, indexed, and variable life products.

Let’s take indexed annuities as an example. This type of financial product promises returns linked to the performance of a market index. Investors make a lump sum payment or a series of payments to an insurance company during what’s called the accumulation phase.

During the annuity phase, the insurance company makes periodic or lump sum payments to investors. But, it’s worth noting that the returns will be linked to the performance of a market index. So, in this case, returns are not guaranteed.

Getting Started as a Retail Investor

For people aiming to start as retail investors (aka individuals), there are a number of options available. One possibility is active investing using an online platform or mobile app, such as SoFi Invest®.

With online-based companies, users can pick and choose from investments—ranging from stocks to fractional shares (Stock Bits), from buying and selling cryptocurrency to exchange-traded funds (ETFs). And, with SoFi, the barrier to entry is low: users can start investing with just $5. Stocks and ETFs trade for no transaction fees on the SoFi platform.

Users who would rather leave portfolio building to professionals might opt for the automated investing option. This hands-off approach has no portfolio management fees at SoFi.

Investment portfolios are built around financial goals, such as saving for retirement or a down payment. With automated investing, a user’s investments get rebalanced, well, automatically. It’s also possible to diversify one’s investment assets here, which may help mitigate against the periodic ups and downs in the market.

For folks who’d like to discuss their financial goals or questions, SoFi members can connect at no cost with financial advisors.

Retirement-minded investors could also set up traditional, SEP and Roth IRA retirement accounts through SoFi—where investments can be managed actively (self-driven) or automatically (managed by someone else).

Curious which online investing option might help you plan for the future? Learn more by speaking with a SoFi financial planner.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

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