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Institutional Investor vs Retail Investor-an Overview

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Institutional Investors vs Retail Investors

Both institutional investors and retail investors are individuals or private firms that invest in public companies. A private company becomes public once they open an IPO (Initial Public Offering) for the public investors. Public investors can invest in that company by purchasing securities or stocks at a price specified by the company (called NAV). These companies could be Mutual Funds, Exchange Traded funds (ETFs), or a SPAC (Special Purpose Acquisition Company). The number of shares that a company opens for the public can be used to determine the size of the company with a metric called market cap. Big companies will have a large market and also a huge number of public investors. These investors generally are of two types: Retail Investors and Institutional Investors.

Retail Investors Overview:

A retail investor is one who invests in publicly traded companies through an online brokerage, traditional stock exchange firms, real estate agents, banks, and so on in a small amount. Also called individual investors, retail investors invest in a non-professional way and invest for their own accounts. Retail investors who want to purchase stocks of any publicly-traded company will go to an online brokerage or stock exchange firm and apply for the demand at a market price. As retail investors are investing in a small amount, the price they pay for every stock is comparatively higher compared to institutional investors. 

Retail investors on themselves could be highly experienced in investing or could hire a professional so that they can safely invest in any public company. As these public companies need to file different kinds of forms (10-Q, 10-K, 8-K, etc.) in the SEC which in turn helps retail investors to educate themselves by reading these filings and also gives them a layer of security that their investment is in under the regulation of SEC. The investing is relatively less as compared to institutional investors as they tend to invest millions of dollars which in general retail investors don’t do. 

Institutional Investors Overview: 

Institutional investors generally are companies or organizations that invest in huge amounts on behalf of clients, shareholders, or customers of that company. Institutional investors include hedge funds, commercial banks, mutual funds, investment advisors, etc. who will invest in publicly traded companies. Institutional investors also called private investors are the ones whom public companies personally visit to collect extra capital through PIPE deals. Institutional investors only buy the shares of those companies only if they see a profit. This is the reason why public companies provide securities at a discounted rate to institutional investors. These types of investments done by institutional investors are called smart money investments.

As these institutional investors tend to invest in companies through PIPE deals, this increases the risk for the retail investors. Private Investment in Public Equity (PIPE) is basically a deal through which these public companies will sell more stocks to institutional investors at a discounted price. Due to this reason, the no. of shares of the company will increase which will eventually dilute the shares with retail investors causing a drastic fall in market price. The securities purchased from PIPE deals are unregistered in the SEC and will have a lock-up period of 45 to 90 days so that investors cannot get instant high revenue by reselling them at market price.

Institutional Investor vs Retail Investor 

While retail investors only tend to purchase a maximum of a couple hundred shares while institutional investors tend to purchase tens of thousands of stocks at one go. Due to this reason, institutions normally do not invest in public companies having micro or nano market caps, as that might cause large market shifts either up or down hurting the retail investors. Also, the retail investors are individual persons who will invest for themselves while the institutional investors are big firms who will invest on behalf of their members. 

As institutional investors are big firms the SEC comes into play to regulate them. The US Securities and Exchange Commission (SEC) requires these institutional investors to file all their investments. Hence, institutional investors file a 13F form for their quarterly holdings and 13G if they have more than 5% of the stocks of any company.  Moreover, these institutional investors do not tend to purchase a high percentage of stocks from a single company as that may violate the SEC regulation.

Final Words

In conclusion, the overview of institutional investor vs retail investor is simple. A retail investor is a person that doesn’t invest huge money and is not SEC certified. Whereas an institutional investor could be a person or private firm that can invest in huge amounts at once and is SEC certified.

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