The two primary types of investors in the stock market are individuals and institutions. The former, who may be referred to as retail investors, can range from wealthy households to individuals with average income. Small investors often rely on the products offered by institutions to make money. Institutions are bigger investors that typically perform the largest trades in the financial markets. Large organizations may trade on behalf of clients or for the institution itself.
An institutional investor could be a financial firm, such as an investment bank, a money management company, or a pension fund, for example. A bank might have an internal team of traders, known as proprietary traders, who use the firm’s money to invest and make money for the organization. An asset management firm typically oversees money on behalf of large and small investors and adheres to a certain strategy to meet risk and reward expectations. Pensions are retirement funds that use the stock market to increase the size of benefits for plan members.
In 2011, the number of individuals who owned stocks in some form dropped more than 10 percent from 2007 levels to 54 percent, according to an article on the Gallup website. The decline in individual stock ownership began when the financial markets entered a recession and equity profits dwindled. The lion’s share of individual investors are between the ages of 50 and 64 and earn a salary of at least $75,000 each year.
Although the size of financial transactions performed by individuals tends to dwarf those done by larger institutions, the difference could work to the advantage of small investors. One strategy suggested in an article on the “Forbes” website is to gain a position in a stock when the equity security appears to be gaining upward momentum. At the soonest sign of weakness, an individual can attempt to unload those positions and sell shares for a profit. It is more difficult for institutions to respond to market conditions as quickly because these organizations usually trade such a large number of shares.
Generally, institutional market participants create some type of asset allocation plan prior to directing any capital to the stock market. This blueprint illustrates the target percentage of total assets that should be placed in certain investment categories, such as stocks, to satisfy client expectations and justify fees. Individuals often invest for a specific event, which may be for retirement, to purchase a vacation home, or to create another income stream. Some individuals, known as professional day traders, buy and sell financial securities throughout the course of the day for a living.