There are two main types of traders: retail and institutional. The major difference between these two types is that retail traders are individual people who sell or buy a security for their personal needs. On the contrary, institutional Forex trading means managing those securities for some group or an institution. An example of the latter is pensions, mutual funds, insurances, and so on.
Ten years ago there was no such thing as retail trading, however, in today’s world, it is one of the largest markets in the world. The statistical numbers show that 250 billion dollars are spent each day in the retail market according to The Bank of International Settlements. This number already shows us the high level of popularity of this type of trading.
Institutional traders had some advantages over the individual traders, however, today these perks are gradually disappearing. This is because retail trading has very important characteristics including the ability to trading with various securities, access to investment data, and so on. However, this fact doesn’t mean that institutional trading doesn’t have essential advantages. There are some markets that are dedicated only to them and not to the retail traders including swaps and forward markets.
Another difference between these two types is that retail traders usually buy and sell assets in round lots of 100 shares or more; however, the institutional traders buy and sell in block trades of 10,000 shares and sometimes even more. Besides, institutional investors sometimes avoid buying a high percentage of companies’ assets because there is a high probability that it will break securities laws.
There are a lot of things to consider while talking about institutional trading vs retail trading. In this guide, we will further discuss the main features and characteristics of each of them and highlight the most important factors related to these two types of trading.
Institutional Traders
As we have already mentioned, institutional trading means buying or selling investment assets for their clients or customers. Mainly there are six types of institutional investors including endowment funds, commercial banks, mutual funds, hedge funds, pension funds, and insurances. In many cases, the institutional traders are not regulated or authorized because they are considered to be ones that can ensure their own securities.
One of the big advantages of institutional investors over retail traders is that they access the resources and a variety of knowledge of almost all the investing opportunities possible in the market. Besides, the key factor about this type of trading is that they have taken big positions in the market which means they are way more powerful forces than the individual investors. However, these big positions affect a great deal on the supply and demand of the market. Also, they tend to make a large number of transactions that have a big impact on the prices of the assets as well.
As we can see, there is a big difference between the institutional and retail traders and we can’t say that retail Forex trading compared to institutional one is better or worse. However, we can emphasize the fact the institutional trading has power over individual traders. This is not very surprising because they really have bigger resources and access to investment opportunities than the retail traders. On top of that, sometimes retail investors are taking examples from them, and that way they try to find out which assets would be better for the retail traders to buy individually.
As we have already mentioned, institutional traders buy or sell about 10,000 shares and sometimes even more. This is a way bigger amount compared to the individual trading capacities. This is why Institutions are the most important power force for the supply and demand of the markets. They even can have a big impact on the price changes in stocks.
As we can see, Institutional traders are the most influential ones in the market. They are like the biggest part of Wall Street. Accordingly, if one wants to have a decent knowledge of the stock market, it is inevitable that he should learn everything about the institutional traders and their investment opportunities as it might impact their future career in the market.
Retail Traders
The retail Forex market was founded after technological development and the internet in the late ’90s. A lot of companies started to realize that the internet could help them to trade with many investors and in order to gain a big amount of money it’s not necessary to be an institution. There are some main characteristics that should be considered while talking about how does retail trading works.
Retail investors are trading through traditional or online brokerage companies. They buy assets for their private accounts and usually, they trade with way less amount of investment compared to the institutional traders. There are some quick facts that are very important to note including
- Retail traders are not professional investors
- They pay high fees and commissions compared to the institutional investors
- The retail market dimensions are limitless
The U.S. Securities and Exchange Commission (SEC) provides retail investors with regulations and authorizations, This helps them to be sure and hopeful about investing money in the market. Individual investors usually buy a small number of assets and this is why they don’t have a big impact on the asset price changes compared to the institutional traders.
It is important to note that a lot of people say retail trading has various disadvantages. In many cases, the main perks are considered to be the lack of knowledge and experience individual investors have while trading in the market. Sometimes they don’t have enough discipline and skills to research the investments. Another essential thing is that people even created a special term called ”piker” to better describe what is a retail FX trader. Specifically, a piker is a broker who trades with a small amount of investment and has very little impact on the market performance.
As we have already mentioned above, the retail trading market is huge in terms of size and scope. About 250 billion dollars are spent each day in the transactions of the retail market according to The Bank of International Settlements. In today’s world, retail traders have access to a lot of financial information about the market, trading education, and other important tools. Besides, brokerage commissions and fees are being gradually declined. On top of that, mobile investment has become a very common thing in the 21st century and investors tend to manage their portfolios from their own phones or other types of devices.
These are very important features of the retail traders and if people want to know everything about the stock market, they need to consider all of them. Sometimes debate about FX retail trading vs institutional is getting too harsh, however, it is very important to note that each one is an independent opportunity with different advantages and disadvantages.
Other Important Considerations
As we have already discussed, retail and institutional trading are two different things. However, sometimes retail investors become institutional ones. This case happens when a person thinks that he does good in the market, has reasonable knowledge and experience, and knows almost every kind of tool that’s necessary for successful trading. So if the trading in the personal account goes well, retail traders start to become members of institutional, and that way, they might continue their future trading as institutional investors. This is the way to generate a way bigger amount of profit compared to retail trading.
Overall Conclusion
In this article, we have already mentioned a few very important and major things related to institutional and retail trading. We explained each of them by claiming that retail investors are individual people who sell or buy an asset for their own needs when retail investors manage the securities for some group or an institution. We found out that each type of trading has its own advantages as well as disadvantages.
Retail traders are not very experienced in the market, they pay high fees and commissions. However, this market has bigger scopes. retail traders have access to numerous financial information of the market.
Compared to that, institutional Forex trading means taking big positions in the market and being way more powerful forces than individual investors.
All of these mentioned facts are very essential features of both retail traders and institutional traders. So if people want to know everything about the stock market, they are recommended to consider all of them.