Why are certain investors called, retail investors? I think I’m confused a bit, because can’t an institution invest in a mutual fund (with mutually funds commonly being called, retail mutual funds)?
Thank you for the help!
A “retail investor” is an individual trading securities in small sizes. The type of investment doesn’t matter.
Yeah, what ohai said. The retail investor is just the end user that’s not an institution. Specifically with mutual funds, there are pricing differences. Retail investors normally buy no-load funds at NAV, or A or C shares if they’re transactional based. Many fund companies also offer an Institutional share class which is also at NAV but with lower expenses compared to the traditional no-load shares (typically called Investor shares). But, retail investors can still buy Institutional shares as long as they meet the minimum which varies by firm.
Although you will hear people describe a certain investment vehicle or investment company as “retail” in a derogatory manner, these people are generally idiots who still suck their thumbs when they think they’re alone. You know who you are.
Actually, I sort of know what OP means whens he mentions “retail” investments. These generally describe the intended purchaser, but this is just a casual definition, not a formal definition. For instance, I might issue a “retail” structured note intended for distribution to retail brokers. However, an investment company could buy these notes if they wanted to. Likewise, a “retail” mutual fund is probably designed for retail customers. However, in other regards, it’s probably similar to a non-“retail” fund.
I once asked about a security we issued and said, “who in the world would buy these” and they replied, “these are catered to retail investors”.
Retail Investor - 3 inch sausage. Institutional Investor - 11 inch sausage.
Especially with the addition of ETFs to the mix, the dividing line between institutional products and retail products is getting blurrier. A key issue with institutional vs retail products is that institutions often have enough leverage to negotiate a different set of fees and level of customization. With retail, it tends to be take-it-or-leave-it. There are also issues with allowable leverage and margin. Institutions are sometimes permitted to take on more leverage than an ordinary retail investor is allowed. Therefore, some products are not suitable for retail investors because of regulatory issues. That is slowly eroding too, sometimes for good, sometimes not so good. It’s nice to have institutional investors from the sales perspective, because you get a bigger bang for your salesmanship buck if you are talented. However, there are also many shops that are so dependent on a particular institution that they would go under if they lost that particular client. People and firms that cater to institutions generally get more prestige and goodies thrown at them, but remember that you can still get rich selling soap to the masses and you can still fail selling jewelry to the upper class.
Size does matter…
Retail and institutional are the accepted nomenclature in the industry.
Institutional Investor = Sell Complex Products to Idiots who don’t Understand them Retail Investor = Idiots who buy Financial Instruments without doing the proper due diligence
Thanks, you really cleared that up.
Haha that was a good one.
Agreed with bchad - with the techonology and product platforms available today it’s tough to clearly say. IMO, the differentiation is anything that requires an ISDA is institutional.
Others have already done that. I was responding to the guy who seemed to think retail was a derogatory name.
Institutional investor = dabbles with complex investments until fund complex implodes or is bailed out Retail investor = uses common sense over models
@Black Swan, if that’s true how in the world do you explain the idiots that bought Linkedin(at $100) and Groupon(at $26) when both began trading on the secondary market? Also, how do explain the fact that the institutional guys that got first dibs on the IPO bought Linkedin at the IPO price of $45 and Groupon at the IPO price of $20. I think your paradigm is off.
I’d say it essentially all boils down to account minimums. If a minimum investment for an investment is low it’s a retail product intended for retail investors, if it’s high (usually $1 million or more) it’s an institutional product for institutional investors. Although some more complex strategies may be available for only institutional investors, even simple long only equity strategies will have lower prices for institutional investors. Of course, many institutional investors will add in their own fees and wrap them up for sale to retail investors.
You can’t assume those were all retail in the secondary without statistics. But I was more focused on structured markets.
@Black Swan, Are you upset about your Groupon purchase? You should be mad at the guy at Schwab that told you to buy that crap! Just joking with you/pulling your chain man.