Institutional Traders
Institutional traders are defined as traders who engage in the buying and selling of securities for the accounts that they manage for any institution or a group of people. Some of the most common examples of institutional traders are mutual funds, pension funds, insurance companies, and exchange-traded funds. These institutional traders are capable of investing in securities that are generally not available for retail traders. These securities include both swaps and forwards.
The complex nature of these types of transactions generally ends up discouraging or prohibiting individual traders. Also, the institutional traders are often solicited for investments in the initial public offerings (IPOs). These traders have the ability to negotiate the best deal possible for such transactions compared to institutional investors. Since institutional traders deal with a large volume of trade, they have the power to make an impact on the share price of any stock. For this very reason, they may also sometimes split the trades among the various brokers. If the institutional fund is sizeable, then they also have the capacity to own a higher market capitalisation.
Retail Traders
The retail traders, who are also referred to as individual traders, can buy or sell the securities for personal accounts. These traders are typically involved in investing in security instruments like bonds, stocks, futures and options. They have almost minimal or no access to the initial public offerings (IPOs). Although retail traders can deal with any number of shares at a particular point in time, the majority of their trading is done in round lots of a hundred shares each.
The actual cost for executing a security trade might be much more for the retail traders if they take the help of a broker. This is because a broker will charge a fixed amount per trade in addition to the distribution and marketing costs. The total number of shares that get traded by the retail traders are usually too few to make a big impact on the price of a security. The retail traders, unlike the institutional traders, have a greater bandwidth to invest in the small-cap stocks. This is simply because the small-cap stocks have a lower price point, which allows the retail traders to buy a number of different securities and that too in an adequate number to fulfil their aim of achieving a diversified portfolio.
Difference between Institutional Traders and Retail Traders
Both retail as well as institutional traders, perform a very important role in the securities market. They help companies raise the required capital to finance their businesses both on a short term and long term basis. However, it must be noted that there are some major areas of difference between institutional traders and retail traders, and we must focus on those points below to get a better idea of the topic:
Institutional Traders | Retail Traders |
| Definition |
Institutional traders are defined as traders who engage in the buying and selling of securities for the accounts that they manage for any institution or a group of people. | The retail traders, who are also referred to as individual traders, can buy or sell the securities for personal accounts, and they are more involved in investing in security instruments like bonds, stocks, futures and options. |
| Large-cap Securities |
The institutional traders have a greater involvement when it comes to investing in large-cap securities. | The retail traders have limited involvement when it comes to investing in large-cap securities. |
| Small-cap Securities |
The institutional traders have limited involvement when it comes to investing in small-cap securities. | The retail traders have a greater involvement when it comes to investing in small-cap securities. |
| Initial Public Offers |
The institutional traders have a near-total involvement when it comes to the Initial Public Offers. | The institutional traders have zero or minimal involvement when it comes to the Initial Public Offers. |
Conclusion
There are a number of points of difference between institutional traders and retail traders. But both of them have a very important role in the running of the financial markets. So it is essential that these traders enhance their capabilities to function in a more efficient manner and bring more capital into the market. Both these vehicles of investment also have a great role in the development and growth of the overall economy of our country in the long run.
Also See:
- Meaning and Reasons for International Trade
- Foreign Trade in India During the Colonial Rule
- Trading and Profit and Loss Account
- Trade Credit Definition Features and Benefits
- Meaning and Characteristics of Not for Profit Organisations
FAQs
An institutional investor trades large volumes of securities on behalf of an individual or shareholder. This large-volume trade motivates brokerages to offer them lower fees. A retail investor is an individual who invests their own capital, typically at lower frequencies and volumes.
What is the difference between institutional trader and retail trader? ›
Institutional traders buy and sell securities for accounts they manage for a group or institution. Retail traders buy or sell securities for personal accounts.
What is the difference between retail and institution? ›
Individual investors are individuals investing on their own behalf, and are also called retail investors. Institutional investors are large firms that invest money on behalf of others, and the group includes large organizations with professional analysts.
What is the difference between Fidelity institutional and retail? ›
The SEC's final rules for money market mutual funds create a new distinction between “retail” prime and municipal funds, which can be held only by individual investors, and “institutional” prime and municipal funds, which can be held by a broader range of investors, including large corporations, small businesses, and ...
What is the difference between a retail trader and a professional trader? ›
Retail traders often rely on self-teaching and online resources. Professional traders have access to advanced technology, analysis, sophisticated trading platforms, and real-time information, giving them an advantage over retail traders who may have limited access to such resources.
What defines a retail trader? ›
A retail trader is an individual trader who trades with money from personal wealth, rather than on behalf of an institution. A retail trader is someone who trades their own money, but not for a living. They buy or sell securities for personal accounts (PA).
What is the difference between retail and trade? ›
Wholesale trade is business-to-business (B2B) where bulk goods are sold to other companies at a reduced price. Retail trade is a buyer-to-customer (B2C) strategy used for selling goods to customers.
Can individuals buy institutional shares? ›
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.
What percentage of the stock market is institutional investors? ›
Institutional investors (professional entities that invest massive sums) are the biggest players on Wall Street, with over 80% of the market cap of U.S. equities in their control.
Are institutional investors good or bad? ›
Institutional investors are entitled to preferential treatment and lower fees. They are also subject to fewer protective rules because they are more qualified traders than individuals and thus better able to protect themselves.
Types of traders include the fundamental trader, noise trader, and market timer. Each type of trader appeals to investors differently and is based on varying strategies. Understanding your own style of trading can help make better-investing decisions.
Can retail traders beat the market? ›
The average investor may not have a very good chance of beating the market. Regular investors may be able to achieve better risk-adjusted returns by focusing on losing less. Consider using low-cost platforms, creating a portfolio with a purpose, and beware of headline risk.
Do any retail traders make money? ›
Forex trading may make you rich if you are a hedge fund with deep pockets or an unusually skilled currency trader. But for the average retail trader, what is often promoted as an easy road to riches, can quickly become a rocky highway to enormous losses and potential penury.
What does an institutional sales trader do? ›
The primary responsibility of the Institutional Sales role is to identify opportunities and develop relationships with Institutional investors and investment consultants in assigned institutional market channels. focused for the applicable presentation, conference, or opportunity.
How much does an institutional trader make? ›
How much does an Institutional Trader make? As of Sep 8, 2024, the average annual pay for an Institutional Trader in the United States is $96,774 a year. Just in case you need a simple salary calculator, that works out to be approximately $46.53 an hour. This is the equivalent of $1,861/week or $8,064/month.
What is institutional trade? ›
Institutional trading consists of the purchase and sale of financial assets by institutions through their traders. This definition of institutional trading applies to institutional equity trading, institutional stock trading, institutional options trading - any subcategory.
What does it take to be an institutional trader? ›
Hold a bachelor's degree (required) Have 2-5 years of experience trading Index and/or Equity Derivatives at a Bank or Propriety Trading Firm. Expertise in trading and position management around market flows.
