Institutional Investors vs. Retail Investors: What's the Difference?

Institutional vs. Retail Investors: An Overview

Investing attracts different kinds of investors for different reasons. The two major types of investors are the institutional investor and the retail investor. An institutional investor is a company or organization with employees who invest on behalf of others (typically, other companies and organizations). The manner in which an institutional investor allocates capital that’s to be invested depends on the goals of the companies or organizations it represents. Some widely known types of institutional investors include pension funds, banks, mutual funds, hedge funds, endowments, and insurance companies.

On the other hand, retail investors are individuals who invest their own money, typically on their own behalf. Broadly speaking, the main differences between the institutional investor and the retail investor are the rate at which each trades, the volume of money and investments involved in their trades, the costs each pays to invest, their investment knowledge and experience, and the access each has to important investment research.

Key Takeaways

  • An institutional investor is a company or organization that trades securities in large enough quantities to qualify for preferential treatment from brokerages and lower fees.
  • A retail investor is an individual or non-professional investor who buys and sells securities through brokerage firms or retirement accounts like 401(k)s.
  • Institutional investors do not use their own money, but rather, they invest the money of others on their behalf.
  • Retail investors are investing for themselves, often in brokerage or retirement accounts.
  • The differences between institutional and retail investors relate to costs, investment opportunities, and access to investment insight and research.

Institutional Investors

Institutional investors are the big guys on the block—the elephants with a large amount of financial weight to push around. They are the pension funds, mutual funds, money managers, insurance companies, investment banks, commercial trusts, endowment funds, hedge funds, and also some private equity investors. Institutional investors account for more than 85% of the volume of trades on the New York Stock Exchange.

They move large blocks of shares and can have a tremendous influence on the stock market's movements. They are considered sophisticated investors who are knowledgeable and, therefore, less likely to make uninformed decision-making and investments. As a result, institutional investors are subject to fewer of the protective regulations that the Securities and Exchange Commission (SEC) provides to your average, everyday, individual investor.

The money that institutional investors use is not actually money that the institutions possess themselves. Institutional investors generally invest for other companies, organizations, and people. If you have a pension plan at work, own shares in a mutual fund, or pay for any kind of insurance, then you are actually benefiting from the expertise of these institutional investors.

Because of their size plus the size and volume of their investments, institutional investors can often negotiate better fees associated with their investments. They also have the ability to gain access to investments normal investors do not, such as investment opportunities with large minimum buy-ins.

Despite the difference in access (when compared to institutional investors) to certain insight, tools, and other data, retail investors can tap into a tremendous amount of high-quality investing and trading research to better inform their decision-making.

Retail Investors

Retail, or non-professional, investors are individuals. Typically, retail investors buy and sell debt, equity, and other investments through a broker, bank, and mutual fund. They execute their trades through traditional, full-service brokerages, discount brokers, and online brokers. Retail investors invest for their own benefit and not on behalf of others. They manage their own money. Usually, when investing for the long term or trading for their own accounts, they invest much smaller amounts less frequently, compared to institutional investors. Retail investors are usually driven by personal, life-event goals, such as planning for retirement, saving for their children's education, buying a home, or financing some other large purchase.

Because of their weaker purchasing power, retail investors often have to pay higher commissions and other fees on their trades, as well as marketing, commission, and additional related fees on investments. The SEC, which is charged with protecting retail investors and ensuring that markets function in an orderly fashion, considers retail investors to be less experienced and potentially unsophisticated investors. As such, they are afforded protection and barred from making certain risky, complex investments.

While they have more access than ever before to solid financial information, investment education, and sophisticated trading platforms, retail investors may be vulnerable to behavioral biases. They may fail to understand the ways a mass of investors can drive the markets.

Advisor Insight

Wyatt Moerdyk, AIF®
Evidence Advisors Investment Management, Boerne, TX

The difference is that a non-institutional investor is an individual person, and an institutional investor is some type of entity: a pension fund, mutual fund company, bank, insurance company, or any other large institution. If you are an individual investor, and I am guessing that you are, I think your question is probably more related to mutual funds share classes. Individual investors are sometimes told by fee-based advisors that they can purchase "institutional" share classes of a mutual fund instead of the fund’s Class A, B, or C shares. Designated with an I, Y, or Z, these shares do not incorporate sales charges and have smaller expense ratios. It’s like a discount for institutional investors because they buy in bulk. The shares’ lower cost translates into a higher rate of return.

Key Differences

There are quite a few differences between the institutional investor and the retail investor, some of which have been pointed out previously. Below, you'll find a summary of key differences that underscores the essential aspects of size and influence belonging to each type of investor.

Institutional Investors vs. Retail Investors: What's the Difference?
   Institutional Investor Retail Investor
Funds Enormous amounts of pooled money that belongs to the companies and organizations for which it invests Limited to the amount an individual can allocate for trading and investing

Potential Trading Impact Large positions and frequent transactions can result in sudden price movements that are unexpected by other investors and can move an entire market in unexpected directions Typically smaller trade sizes and less frequent trading has little adverse effect on market movement 



Emotional Trading Less of an issue due to investment and market experience and expertise, education, and instant access to feedback and advice

May occur due to lack of investment education and readily available market feedback; can have a positive or negative impact on markets if substantial trading occurs by enough individuals
Transaction Type/Size Example Block trades of 10,000 shares or more Round lots of 100 shares or more
Protective Regulations Subject to less protective regulation due to investment expertise and knowledge Subject to more protective regulation due to perceived experience, education
Limits Not likely to limit buying to any particular size of company or share price level

More likely to invest in stocks of companies with lower share prices to enable more purchases for diversification
Information Advantage Access to extensive market research and up-to-the-minute market insight and specialist feedback Access to a wealth of information, has less access to the information reserved for institutional investors

What Percentage of Investors Are Institutional?

The entire number of actual, active investors, both institutional and retail, is hard to know. However, it is known that institutional investors account for more than 85% of the volume of trades on the New York Stock Exchange.

What Are the Different Types of Institutional Investors?

Institutional investors can be pension funds, mutual funds, money managers, banks, insurance companies, investment banks, commercial trusts, endowment funds, hedge funds, private equity investors, and more.

What Is a Retail Fund?

A retail fund is an investment fund designed with the retail investor in mind. For instance, a mutual fund or exchange-traded fund is a retail fund. Retail funds offer investment opportunities primarily to individual investors rather than institutional investors. They trade on the open market. Often, they have low or no minimum balance requirement but they may charge large management fees (compared to those charged by institutional funds).

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  1. Reuters. "Retail Traders Account for 10% of U.S. Stock Trading Volume—Morgan Stanley."