Difference between Institutional Traders and Retail Traders

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.

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