Individual investors vs. institutional investors: How they differ

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Investing can be a complex world, with many different players, strategies and goals. Two of the most significant types of investors are individual investors and institutional investors. 

• 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.

These two groups approach investing in very different ways, and understanding these differences can be helpful for anyone trying to navigate the market. 

Here’s what you need to know. 

What is an institutional investor?

An institutional investor is a large organization that invests money on behalf of others. These investors come in many forms, such as pensions, mutual funds, banks, hedge funds, insurance companies and more. For example, one type of institutional investor is a mutual fund, in which a fund manager buys and sells securities on behalf of the individual investors who buy the fund.

Institutional investors pool money for individual investors or organizations. Because they pool money, institutional investors have much more money to invest than all but the wealthiest individual investors. They use that money to buy large blocks of securities, and their massive size means that institutional investors’ trades can have a powerful impact on the market.

Institutional investors tend to have more experience in the market and more knowledge. They may have access to investment research that retail investors do not and have financial resources that allow them to conduct their own research. In addition, they might have access to investments individuals do not, such as institutional index funds with very high minimums. These large institutional funds often have lower fees than those available to individual investors.

Because institutional investors tend to be more knowledgeable and experienced, they must comply with different Securities and Exchange Commission (SEC) regulations then individual investors.

What is an individual (retail) investor?

An individual investor, or retail investor, is a person who invests their own money, usually through an online broker, bank or a mutual fund. They invest to meet their individual investment goals, such as to save for retirement, a child’s education fund or to build wealth generally.

Individual investors usually invest smaller amounts more frequently than institutional investors. For example, they may have money withheld from each paycheck for an employer-sponsored 401(k) plan. Or they might automatically invest money in an IRA every month.

Retail investors tend to be less experienced and less knowledgeable than institutional investors. This, in addition to the fact that retail investors trade with their own money, might explain why they are more prone to emotional trading decisions than institutional investors.

Key differences between individual and institutional investors

We’ve highlighted some of the differences between these two types of investors throughout, but now let’s compare them side-by-side.

Investment volume and access

Individual investors tend to invest small amounts of money, such as with each paycheck. They often invest through mutual funds at work or buy exchange-traded funds (ETFs) from an online broker.

Institutional investors, on the other hand, tend to buy or sell in bulk, because they usually have much more money to trade than retail investors. This amount of money gives them access to institutional funds with minimums that put them out of reach for most individual investors.

But having a huge amount of money does come with some downsides, too. Large investors are unable to invest in the market’s smaller stocks, because it just won’t “move the needle” on their performance. In contrast, individual investors can buy many smaller, still-attractive stocks without fear that all the good bargains will be purchased by institutional investors.

Knowledge and research

Institutional investors tend to have a significant advantage over individual investors in investment knowledge and research. Institutional investors have more resources, allowing them to conduct more detailed research and therefore make more informed investment decisions. The information gap has narrowed somewhat in recent years since many of the best online brokers for stock trading now offer extensive research tools to everyday invesotes. However, institutional investors still tend to be better informed than individual investors.

Fees

Institutional investors have also had the advantage when it comes to fees. Institutional funds, for instance, tend to have high minimum investments but also come with lower fees. Fortunately, this gap has also narrowed in recent years after a majority of online brokers eliminated trading fees and some of the best index funds have cut their expense ratios to near zero. 

Temperament

While many individual investors are impulsive or think only about the short term, the best individuals have a clear edge over institutional investors because of a superior temperament. For example, when the market falls, many institutional investors such as mutual funds have to sell to meet redemptions in their funds, as their investors run for the exits. In contrast, even-tempered individual investors don’t face this imperative, and can more thoughtfully evaluate the market, find attractive investments amid the rubble and continue to think long term.

Additionally, institutional investors may have a decision-making process that involves several people or investment committees, which can slow down decisions and lead to a herd mentality. Individuals only have to answer to themselves, which may be an advantage during periods of volatility when the investment landscape is changing quickly.

Bottom line

Individual investors and institutional investors are the two major groups that invest in the market. Both types of investors have their own advantages, and a sharp investor will try to make the best use of their own advantages, whether that’s size, agility or knowledge, to outperform.