RETAIL VS INSTITUTIONAL INVESTORS- MASTER THE BASICS

RETAIL VS INSTITUTIONAL INVESTORS- MASTER THE BASICS

Financial markets can be defined as any marketplace where buying and selling of securities take place. These markets play an instrumental role in the smooth flow of operations in capitalist economies. Markets mainly function via Investors who can be defined as the people who commit capital with the expectation of receiving financial returns. There are various categories of investors in a financial market and the following section will throw light on some of the major categories of investors.

Public or Retail investors, DIIs, FIIs, and Proprietary trading firms can be considered as some of the main categories of investors in the Indian markets. Retail investors represent non-professional market participants who generally invest smaller amounts. While these non-institutional investors are usually less knowledgeable, less disciplined, less skillful, and more prone to behavioral and emotional errors, Institutional Investors are sophisticated, knowledgeable, and are less prone to make uneducated investments. The following section provides insights into the categories of Investors mentioned above.

1. RETAIL INVESTORS

A  Retail Individual Investor applies or bids for securities of or for a value that does not exceed Rs 2,00,000 in an IPO. They buy or hold shares worth less than Rs 2,00,000 in a stock. There are no limits in commodities defining a retail investor. They buy and sell securities or funds that contain a basket of securities such as mutual funds and exchange-traded funds (ETFs).

They purchase securities for their accounts and often trade in much lower amounts than institutional investors like mutual funds, pension funds, EPFO, or foreign institutional investors. The purchasing power of these investors is small which puts them in a situation to pay comparatively higher fees for their transactions. SEBI constantly forms and amend laws to protect this category of investors. Moreover, these investors are also barred from investing in certain riskier securities.

2. DOMESTIC INSTITUTIONAL INVESTORS (DII)

Institutional Investors who manage the investments of securities and other financial assets of the country they are based in are known as Domestic Institutional Investors. Institutional Investments refer to the investments organizations such as banks, insurance companies, mutual fund houses, etc. make in the financial assets of a country. Domestic economic, as well as political trends, affect such investments. Both Domestic Institutional Investors, as well as Foreign Institutional Investors, influence the net investment flows into the economy. The 4 types of DIIs in India include:-

1.            Indian Mutual Funds

2.            Indian Insurance Companies

3.            Local Pension Funds

4.            Banking & Financial Institutions

3. FOREIGN INSTITUTIONAL INVESTOR (FII)

Foreign Institutional Investors are those who invest in a country outside of the one in which it is registered or headquartered. Probably they are most commonly used in India denoting outside entities investing in the nation’s financial markets. This category includes hedge funds, insurance companies, pension funds, investment banks, and mutual funds. These big companies such as investment banks, mutual funds act as important sources of capital in developing economies. They are known for encouraging investment from all classes of investors. Investments made by FIIs/FPIs in India are regulated by the Securities and Exchange Board of India (SEBI). However, the ceiling on such investments is maintained by the Reserve Bank of India (RBI).

  4. PROPRIETARY TRADING FIRMS

The term ‘Proprietary Trading Firm’ denotes financial firms or commercial banks that invest for direct market gain. Proprietary Trading or Prop Trading takes place when a financial firm chooses to profit from market activities. Trading of stocks, bonds, commodities, currencies, etc., fall under the category of Proprietary Trading.

Firms engaging in proprietary trading believe they have a competitive advantage that can enable them to earn an annual return that exceeds index investing, bond yield appreciation, or other investment styles.

Proprietary Trading Enables firms to quickly become key market markers and this category of traders have the access to sophisticated proprietary trading technology and other automated software. This in turn gives them access to a wide range of markets combined with the ability to automate processes and engage in high-frequency trading.

Now that you are aware of these categories, which one do you fall into??

Idea & Concept– Mr. Josin Jacob

Content Development: Aswathi Satish, Niyog Consultancy Services Pvt. Ltd.