Institutional Traders vs. Retail Traders: An Overview
It is possible to trade securities by just clicking the buy or sell button on an electronic trading account. More advanced traders, on the other hand, may choose more complicated transactions by putting a limit price on a block trade that is parsed over many brokers and traded over multiple days. The distinction is in the kind of trader, of which there are two: retail and institutional.
Retail traders, often known as individual traders, purchase and sell stocks for their own accounts. Institutional traders purchase and sell stocks on behalf of a group or organization. Common institutional traders include pension funds, mutual fund families, insurance firms, and exchange traded funds (ETFs).
Several advantages that institutional traders historically had over ordinary investors have vanished. The availability of sophisticated online brokerages, the capacity to trade and receive more diversified assets (such as options), real-time data, and the broad availability of investing data and research have all contributed to a narrowing of the gap.
However, the gap has not been totally filled. Institutions continue to enjoy various benefits, including access to additional securities (IPOs, futures, and swaps), the capacity to negotiate trading costs, and the assurance of the best pricing and execution.
- Institutional traders purchase and sell stocks on behalf of a group or organization.
- Retail traders buy or sell securities for personal accounts.
- Institutional traders usually trade larger sizes and can trade more exotic products.
- Online brokerages and other factors have narrowed the gap between institutional and retail traders, which once gave institutional traders an advantage.
Institutional traders may invest in assets that regular traders do not have access to, such as forwards and swaps. Individual traders are often discouraged or prohibited by the complicated structure and kinds of trades. In addition, institutional traders are often approached for IPO investments.
Institutional traders often deal in blocks of at least 10,000 shares and may reduce costs by submitting transactions directly to exchanges or via an intermediary.
For each transaction, institutional traders negotiate basis point costs and demand the best pricing and execution. They do not have to pay marketing or distribution expenditure percentages.
Because of their huge volume, institutional traders may have a significant influence on a security’s share price. As a result, they may occasionally spread transactions across several brokers or over time in order to not have a major influence.
The bigger the market cap institutional traders prefer to possess, the larger the institutional fund. It is more difficult to invest large sums of money in smaller-cap companies because traders may not want to be majority owners or reduce liquidity to the point where there is no one to take the other side of the transaction.
Retail traders primarily buy in stocks, bonds, options, and futures, and they have little to no access to initial public offerings (IPOs). The majority of deals are performed in round lots (100 shares), however retail traders may exchange any number of shares at once.
If retail traders use a broker that charges a flat fee per transaction in addition to marketing and distribution expenditures, the cost of making trades may be greater. The number of shares exchanged by ordinary traders is often insufficient to influence the price of the asset.
Retail traders, as opposed to institutional traders, are more inclined to invest in small-cap companies since they may have lower price points, enabling them to acquire a diverse portfolio of securities in an acceptable number of shares.
Despite the fact that retail traders and institutional traders are two separate types of traders, retail traders often become institutional traders. A retail trader may begin by trading for their own personal account, and if they succeed, they may begin trading for friends and family.
If a retail trader continues to achieve strong returns and attract more funds from other investors, they may form what amounts to a tiny investment fund. This exponential expansion may continue indefinitely, until the retail trader becomes an institutional trader.
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