In this article on retail investors vs. institutional investors, you will understand the difference between the two on terms of major factors.
We often hear the terms ‘retail investor’ and ‘institutional investor’ in the global stock markets. The functions and style of operation of both of these is totally different. Let us read the following paragraphs on retail investors vs. institutional investors, and compare the two types to know the points that differentiate them from each other.
Distinguishing Factors of Retail Investors
Definition
They are the individuals and small groups who invest in the equity market for either short-term or long-term gains.
Risks
Their risk-taking ability is very less.
Stock Exchange
They constitute a very small portion of the total volumes generated on the stock exchange. This is true in the case of almost all the stock exchanges in the world. Hence, they do not dominate much of the stock market.
Planning and Management
Their financial planning and management is not very efficient, at least when compared to their counterpart.
Lack of Knowledge
Lack of knowledge of the stock markets is an age-old problem. Many times, they depend on the news in the market or tips from technical analysts to trade in stocks. Nowadays, many of them are seen copying the moves of their large counterparts, which can be disastrous for them. Instead, they should prepare their own stock portfolio based on their risk taking ability and invest for the long-term to beat short-term volatility in the markets.
Performance Pressure
They have lesser performance pressure as compared to their counterparts.
Distinguishing Factors of Institutional Investors
Definition
They are the banks, financial services firms, different financial institutions, and mutual fund companies, which make heavy investments in the stock markets generally for a prolonged period of time.
Risks
Their risk taking capacity is far more than that of their counterpart. That is why we see many of them purchasing falling stocks or holding stocks even in the phase of a bear market.
Stock Exchange
They mostly control and direct the stock markets across the world. They can either be the domestic ones or the foreign ones who have sought the requisite permissions to invest in markets of various countries.
Planning and Management
Their financial planning and management is very sophisticated and perfect. That is why, it has been observed that they have always made more money.
Lack of Knowledge
Unlike their counterparts, they have their own talented research teams, which conduct a thorough stock research before investing.
Performance Pressure
They have a lot of performance pressure, as they have the money of the masses with them, and they need to give the promised returns on investment to maintain their standard in the industry.
These days, a lot of efforts are being made to increase the retail participation in the stock market. This will not only increase the total turnover of the exchanges, but also help more and more investors to get decent returns. After reading this article, you must have surely understood the difference between retail and institutional investors. From the comparison, we arrive at the conclusion that retail investors have a long way to go in the world capital markets.