Those of us who spent the bulk of Intro to Financial Management scrolling through Facebook may be unfamiliar with terms like institutional vs retail investors.
But don’t worry, because we’re here to break it down for you.
Let’s Start With the Basics:
Investments kind of work like the famous marshmallow test. The more patience you have, the better the outcome.
Investing allows individuals to buy shares in assets with the goal of earning income later and if you’re willing to take it slow, you can potentially earn a lot of money. In short, good things come to those who wait.
Now let’s take it up a notch and delve into institutional and retail investments.
What is a Retail Investment?
Think of retail investments as shopping at a boutique but with a personal shopper (we can only dream).
Retail investors use middlemen like brokers or traditional firms to buy and sell securities, mutual funds and pensions. These kinds of investments are usually smaller and less risky than institutional investments.
Here are some of the benefits associated with retail investments:
1) Patience is a virtue: Unlike institutional investors who need to make decisions faster than the Bachelor at a rose ceremony, retail investors can take their time buying and selling assets.
2) Flexibility: Retail investments tend to be smaller and less complicated than other kinds of investments, which means buying and selling stocks is easier. In comparison, institutional investments (which we’ll get to shortly) are more difficult and complex to trade.
What is an Institutional Investment?
We’re about to transition from retail to wholesale.
Institutional investors are kind of like Costco members. They buy different types of stocks in bulk and have access to stocks that aren’t open to retail investors. Institutional investors manage larger and more complicated portfolios like multiple pension plans, funds, and insurance.
Most of you who are reading this are probably benefitting from their expertise right now. To put it mildly, institutional investors have a big influence on the stock market.
Get this. 80% of stocks on the S&P 500 are owned by institutional investors. That’s ¾ of the New York Stock Exchange.
Let’s Take a Look at the Different Types of Institutional Funds
Defined contribution funds are retirement plans which include regular contributions from employees and employers.
Defined Contribution Fund
Whether or not a retiree will be able to spend his golden years golfing at Pine Valley, is dependent on how much his fund will have earned upon retirement.
Mutual Funds
Mutual funds include a range of stocks, bonds, and other securities.
Unlike more exclusive institutional investment funds, retail investors can purchase these kinds of shares.
Hedge Funds
If you’re single and on Match.com, we recommend that your profile include “looking for a partner in hedge funds” because they’ll probably be able to give you the honeymoon you’ve been dreaming about in the Maldives.
Think of hedge funds as investments for the elite. In order to invest in hedge funds you need to have a minimum net worth of $1 million.
Banks
Major banks like Bank of America, Wells Fargo and CitiBank are institutional investors.
Insurance Companies
The institutional investment industry would not exist without insurance companies. As of last year, the insurance sector owned a whopping $4 trillion (yes trillion) in cash and investments.
Now that you understand who and what institutional investors are, you probably are wondering what the positive is of investing in an institutional investment.
The Benefits of Institutional Investments:
1) Fees: For those of us who have lived long enough to remember life before free shipping, we already know that fees are the worst. Institutional investors offer lower trade fees than retail investors.
2) It’s All About the Benjamins: Unfortunately in the investment world, more cash means more opportunities. Institutional investors have large amounts of money available to them which means that they can buy lots of shares at one time.
3) This Club is Exclusive: An institutional investor is kind of like a member of the coveted Boom Boom Room rooftop club in NYC. These types of investors are offered access to certain stocks at limited prices which are closed to the public.
The Bottom Line
Understanding the differences between retail vs. institutional investors is certainly worthwhile with both having their own advantages. Saying that institutional and retail investors are similar, would be like comparing Spirit Airlines to flying Emirates.
Institutional investors definitely offer more trading opportunities than retail investors, but that gap is becoming smaller and smaller.
A growing number of investments, which have typically been limited to prominent investment funds, are now opening up to retail investors.
Retail investors must feel like we did when Jason Wu and Zac Posen created a clothing line for Target.
Knowledge is power and as retail investors have access to more information about trading options they’ll be able to increasingly take advantage of a bigger range of investment opportunities. Companies like MWMfund are opening doors, making investing more inclusive while focusing on both profit and purpose. MWMfund, only requiring a $200 minimum buy-in provides an opportunity to earn passive income; while helping families stay in their homes.
Have questions about investing with MWMfund? Reach out to us at hello@mwmfund.com.
Be sure to check out The MWMfund Learning Center for more educational content.
