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Retail Investors vs. Institutional Investors: What You Need to Know

Views 18KMar 22, 2024

When you first dive into investing, you will likely hear terms like "retail investor" and "institutional investor." You want to know what category you fall into and why the industry bothers to distinguish between these two types.

In this article, we’ll discuss:

  • The two main type of investors: Retail vs. Institutional.

  • The rules and key differences between retail and institutional investors.

  • How retail investors can gain insights into Institutional investors’ strategies.

Retail versus institutional investors have different goals and play different roles in the overall stock market. If you have been researching these two terms and you want to learn more, we will answer your questions and help you understand the difference between these two important types.

Let's explore the differences.

What is the difference between a retail investor and an institutional investor?

What is a Retail Investor?

Retail investors are regular individual investors making investments to advance their personal goals such as retirement, college funds, etc. If you currently own individual investments such as IRA or 401K, you are most likely a retail investor, also referred to as a non-professional, or non-institutional investor.

As non-professionals, retail investors use brokerage firms, like Futu, inc., to invest their money in stocks, options, ETFs or bonds. You might also make investments through retirement accounts, such as 401(k)s. You make these investments to help you achieve your own financial goals. You may wish to generate income for yourself, build your retirement savings, or otherwise build your assets by investing in the stock market.

What is an Institutional Investor?

Institutional investors are companies that pool and invest money on behalf of clients, members or shareholders.  When you think of an institutional investor, think of a business or large company. Some institutional investors include investment banks, pension funds, endowment funds, investment management companies (e.g., mutual funds), and Insurance companies.

Institutional investors manage investment money other people have entrusted to them. They are responsible for making investment decisions on behalf of other people.  These groups are considered professionals, and thus they are highly regulated by the Securities and Exchange Commission (SEC). As professionals, they can easily gain access to investment research and market analysis data that may not be available to regular retail investors.

Retail investors interested in building their stock investment strategy often find that paying attention to the choices and paths taken by institutional investors can help them make educated investment decisions. They can use the data and information from these institutions to better understand some of the trends and patterns they observe in the market.

What are the differences in rules and regulations between retail and institutional investors?

Given the differences between the institutional investors and retail investors, it makes sense that the SEC has rules and regulations protect the retail investors. They are considered as non-professional, despite of having limited access to research data and a lack of professional training, a retail investor still has to make investment decisions at their own risk. 

Therefore, the SEC sets regulations such as the Regulation Best Interest, which requires broker-dealers to act in the investor's best interest. In other words, the code of conduct requires that the financial advisers and brokers you turn to help guide your investments have to act in your best interest and not their own or anyone else's.

An institutional investor's primary goal is to generate profits for their investors which differs from a retail investor whose primary objective is to generate profits for their own personal capital gain. Since these institutions invest on such a large scale, they can access certain types of investments -- such as hedge funds-- that retail investors may not have access to. Similarly, because they buy securities in such large quantities, they may also secure lower transaction costs than retail investors.

Why should a retail investor pay attention to institutional investors?

According to an Investopedia, Institutional investors account for so much trading that they actually make up more than 85 percent of the volume traded on the NYSE. In other words, the decisions of various investors of this magnitude can have a notable impact on prices and trends in the market. Retail investors following these trends can use the information to develop their strategy.

Retail investors interested in improving their strategies will also find that tracking where these large-scale investors buy or sell stock can provide valuable insight. Many investors find it helpful to follow the patterns of institutional investors and watch their trading to gain ideas for their own portfolios.

The institutional investors have access to teams of professional strategists and levels of data that do not exist for typical investors. Therefore, investigating the stocks that these 'big fish' make can clue small-scale investors, like the typical retail investors, into potential investment opportunities.

Understanding the different types of investors

As a retail investor, you have tools in place to help you make wise decisions as you invest in the stock market. Understanding the difference between your capabilities as an investor and what institutional investors do in the market can help you better see the power and potential of the data available from these of investors.

As you start to build your portfolio, take some time to investigate recent trends and movements of institutional investors. Make a note of where they buy and sell and see if the information you uncover sparks interest for you in particular stocks.

How does moomoo provide investors with the data and support they need?

When you log into the moomoo app, you will find that you have information at your fingertips to make it easy to track institutional investors and then use that data to work for you.

We offer an easy-to-read, one-stop data source on more than 10,000 institutional investors, such as Berkshire Hathaway, Soros Capital, and Hillhouse Capital. You can access a wide variety of information regarding their portfolio holdings and more from a single screen. When you browse specific stocks through the moomoo app, you can see which investors hold a specific stock through the individual stock summary. If you want to interact with other investors who are following the investment strategy of these big players, tap into the Moo community, a global stock trading community with over 17 million registered users.  

This data can help you investigate patterns and how this particular group is buying and selling. As you find stocks that interest you, you can add them to your watch list, and drill into them further to uncover their recent information.

In other words, we make it easy to use the data collected from institutional investors and use it to power your portfolio with just a few clicks. Creating a data-backed portfolio has never been easier than with our convenient app.

Download the moomoo app to build a well-researched portfolio and feel more confident in your investment decisions.

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