While differentiating Retail investors and Institutional investors may seem simple, there are lots of benefits in knowing how to distinguish these two types of investors as well as the many factors to consider regarding retail and institutional investment interests.
Retail investors are investors like you and I. They trade stocks, mutual funds, and other securities on their own behalf through a brokerage and are classified as non-professionals (in the world of investing, that is.)
Institutional investors are people or organizations that trade securities in large quantities. They are typically investing on behalf of other people, funds, or organizations and will usually receive preferential treatment and lower fees.
We’re going to dive into the ins-and-outs of both investor types as well as shed some light on the trends we are witnessing today regarding the breakdown of retail and institutional investors as it pertains to the financial markets.
The rise of the millennial investor and growing retail interest has created unique market conditions that we have been keeping a close eye on.
Breaking It Down The Differences
Institutional investors come in the form of mutual funds, hedge funds, commercial trusts, pension funds… you name it. They are buying and selling large blocks of shares on behalf of large funds or pools of
According to Investopedia, 85% of the volume on the New York Stock Exchange (NYSE) comes from institutional investors. Because the volume of shares being traded is quite significant, these investors can deploy tons of influence on the movements of the market.
Imagine if a stock trading at a market price of $10/share had a block of 1 million shares being bid for at $9.95. Limit orders below $9.95 would not get filled and market orders to sell would likely get swallowed up by the 1 million shares bid at $9.95. The stock price would need over 1 million shares, or $9.95 million sold to break through this support level.
The same goes for a large sell order, or short order. A block of 1 million shares sold (or shorted) at $10.05 per share will make it difficult for the stock to get through that, in fact, it will likely take 1 million shares or $1.05m bought to break through that resistance level!
There are certain protective regulations that many retail investors are subject to, such as the extensive qualification process for clients of financial advisors. Institutional entities are exempt from some of these, as they are considered sophisticated investors who are not as likely to make uneducated investments.
Another unique aspect of institutional investors is that they traditionally invest on behalf of other groups or people. For example, if you are invested in a mutual fund, pension plan, or any kind of insurance plan/segregated funds, your capital is at the hands of expert institutional investors.
Any investors that are not institutional are considered retail investors. This includes anyone who trades debt securities (bonds), equities (stocks), or any other kind of financial instruments. Retail investors like you and I usually have personal goals within their investments, as they are investing their own capital.
By definition, an individual who trades on behalf of institutions as an institutional investor is still a retail investor when trading securities within that individual’s personal account.
Fees paid on trade commissions are typically higher for retail investors. Because they are considered “unsophisticated investors,” regulatory bodies such as the Securities & Exchange Commission (SEC) implements stringent protections to prevent retail investors from making investments that are overly complex, or high-risk.
The Rise of the Millennial Investor
The capital markets have been on quite the emotional rollercoaster this year and last as the global economy continues to battle the pandemic. A new kind of retail investor seems to have captured the markets attention, which has been dub “the millennial investor.”
Perhaps the largest rally, recruitment, and definition of the millennial investor was driven by the legendary phenomena bull run of two popular public companies: Game Stop ($GME) and AMC Entertainment Holdings ($AMC).
Message boards on Reddit, WallStreetBets in particular, were in constant chatter about a post regarding the massively inflated naked short interest on $GME. Theories regarding the ability to “squeeze” out the huge and rather irresponsible bearish bets on the stock started to gain momentum.
Did you know? Naked short selling is unlawfully short selling shares that have neither been borrowed nor located. If sellers are engaged in naked short selling, then the volume of stock may be larger than the tradable shares in the market, which can lead to sellers failing to deliver securities sold by the settlement date.
What was thought to be unimaginable happened; the amount of buying volume brought in from the entire WallStreetBets (the most popular stock forum on Reddit) started to propel the stock upwards, so much that hedge funds and other institutional investors who had massive short interest started to be squeezed out.
One unsuspecting hedge fund, Melvin Capital even had to be bailed out due to the financial losses. As for GameStop, a struggling video game retailer, we can imagine they were hit with a stroke of luck as their stock was up 2000% on the year at one point.
AMC Entertainment Holdings ($AMC) had a very similar fortune, around the same time period as the $GME saga. Their stock price went from 2021 January lows of $2 per share to a high of $70 per share in June.
Retail investors began targeting any beaten-down stock with high short interest and attempted to garner enthusiasm from the internet community to collectively squeeze out the short-sellers. Companies such as Blackberry Ltd. ($BB) and Nokia ($NOK) were also targeted by the herd squeeze trading strategy, seeing temporary unanticipated bullish runs.
Due to the increasing awareness of public disclosure documents and how to read them, there is a growing amount of retail investors who have been taking to the internet to retrieve professional-grade information to influence their investment decisions.
The millennial investor is the new and improved rendition of the classic retail investor, starting their trading journey on the plethora of entry-level commission-free apps and growing their portfolios based on the large umbrella research being conducted on public forums such as Reddit.
Millennial Retail Investors Growth in the Markets
According to estimates from JPM Securities, there have been 10 million new investors that have entered the market since the beginning of the pandemic in 2020. Not only has accessibility increase for the retail investors, considering the numerous brokerage apps for trading, but the pandemic also influenced people to consider putting their
Government stimulus payments were a large part of the reason many new retail investors experimented in investing. However, the economic breakdown of the pandemic proved to people how important it is to have
In a survey conducted by Charles Schwab, 15% of all current U.S. stock market investors placed their first-ever trade in 2020.
According to Joe Mecane, head of execution services at Citadel Securities, retail investors make up to 25% of trading volume on peak days of trading. These new millennial investors are often referred to as “Robinhood investors.”
Although 60% of new investor accounts in the U.S. entered through Robinhood, the term was coined due to the massive wave of new investors entering the equities markets.
“Millennial investors” come with a unique set of characteristics. They are younger and are able to absorb more risk in their portfolios. Plenty of them appear to be looking to make a quick buck, as the term “buy-and-hold” doesn’t seem to carry much strategic weight.
It isn’t a shock to see millennials entering the stock market with the mission to increase they wealth. Their share of the household wealth is low and they haven’t reaped much of the rewards that we’ve seen their predecessors enjoy.
Property is much more unaffordable than it was in previous generations, while education prices have skyrocketed.
In a 2018 study led by Kuhn, Schularick and Steins, the distribution of income and wealth within the U.S. was tracked and dated as far back as 1949. Housing booms provided gains of wealth for middle-class households, while stock market booms provided an increase in wealth for households that owned stocks or businesses. The latter affected only the top 10% of households.
Today, it is hard for millennials to get ahead by simply working. To get an edge, they are dipping their toes in the equities markets for parabolic returns.
Long-term Outlook For Millennial Investors
Although it seems that millennial investors aren’t going anywhere, there is still inherent risks on the market today, for retail investors of all kinds.
Financial education is more important than ever, as buying stocks with inflated P/E ratios such as GameStop and AMC is typically a very risky move, not to mention the tax consequences of short-term trading.
The effect this new wave of investors has on the market can be quite significant. The rally of GameStop shares was so high that some online brokerages had to restrict trading of the video games retailer.
Regulators had to scratch their heads to figure out the best solution; online brokers such as Robinhood were restricting buy orders of $GME, only allowing selling due to a supposedly overloaded back end clearing system.
At the same time, it was found that Robinhood was being compensated by market makers and hedge funds to execute their trades on behalf of their customers, causing an allegation of front-running. The millennial investor army’s ability to make ripples throughout the equities markets shows how powerful people can be in numbers.
There is still plenty of long-term opportunity for this new wave of retail investors. Key financial knowledge is easily accessible and investors in their early 20s are now learning tactics that were once only available to established finance professionals.
One thing that ties in with millennial investors is the growing requirements for ESG (environmental, social and corporate governance). Millennial investors have been shown to be twice as likely to invest based on environmental sustainability and forward-thinking companies.
There is a staggering US$30 trillion in wealth that is expected to be passed on from baby boomers to the younger generations over the next 20 years. This poses many questions for the future of wealth inequality. Due to the many different ways to enter the world of investing nowadays, one can only expect financial literacy to spread like wildfire.
Did you know? Front running is an unlawful act that involves brokers or market makers having access to the bids and asks of retail investors, and using that knowledge to their advantage within the market.
Generation Z are individuals born between 1997-2015. Their first impressions of the world of investing are very different than any other generation.
They are going to see easily accessible trading apps, readily available financial information, decentralized finance (DeFi) and more.
Did you know? DeFi is a new way to execute financial transactions. Using applications, it cuts out the middleman that is financial institutions and intermediaries and conducts everything over the blockchain. The middlemen that are cut out includes but is not limited to brokerages, banks, exchanges among others.
The once bizarre and complex inner workings of the financial world are slowly becoming clearer and clearer. Social media apps such as Instagram, Twitter, and TikTok are full of users posting short snippets of financial information that is communicated in a way that is easy to digest.
Reasons why Gen Z trading enthusiasts are turning to social media for advice:
- Social media content is more relatable than your average investment advisor/investing educational resources.
- Attention span: It is a lot easier to digest little bits of information at a time. The attention spans of the younger generations is lessening. The average attention span of a millennial is 12 seconds, while generation Z is about 8 seconds.
- Social media is entertaining. Millennial investors feel more comfortable and productive when being stimulated by something like a quick video, versus a traditional book or a lecture.
- Social media is accessible on the fly. As many young people are busy and on the move, the ability to check their phones and digest investing knowledge anywhere they are means they are more likely to be doing more learning, more often.
While there are advantages to having traditional stockbrokers managing your