Retail, Institutional, and Accredited Investors: What does that mean?
When looking up various investment options or listening to financial news, you may have heard the terms retail, institution and accredited investor here and there. Here is a high level summary of what those investor types mean and their corresponding level of investment access:
Retail Investor:
Who they are: an employee deferring a portion of their paycheck into a 401(k) account, an individual deciding between investing in individual stocks or an index fund, or a new parent investing for their children’s education. This could be you, your neighbor, or your coworker.
How they invest: Retail investors typically put their money into stocks, bonds, mutual funds, or ETFs (Exchange-Traded Funds) available to the general public. They might use an online brokerage account to buy and sell these investments.
Key characteristics: They usually invest smaller amounts than big players in the market and might not have the same level of knowledge or access to investment opportunities that larger investors do.
Institutional Investor:
Who they are: These are the big players, like pension funds, mutual funds, insurance companies, and banks. Think of them as professional investment teams managing large pools of money.
How they invest: Institutional investors invest in a wide range of assets, including stocks, bonds, and real estate, but they also have access to specialized investments not typically available to retail investors like real estate joint ventures or private equity funds. They have a lot of money to invest, which can give them more influence in the markets and better terms in their investments.
Key characteristics: Depending on their size and expertise, they can consider making riskier investments to meet their investment objectives. They also have professionals who are experts in assessing investment risks and opportunities.
Accredited Investor:
Who they are: Accredited investors can be individuals or entities (like a company or a fund) that meet certain financial criteria. For individuals, this means a $1,000,000 net worth not including primary residence, or $200,000 individual annual income, or $300,000 annual income jointly with a spouse.
How they invest: Accredited investors have the opportunity to invest in more sophisticated, complex and potentially riskier investments. This includes strategies like private real estate, hedge funds, and venture capital that can provide diversified exposure to other asset classes.
Key characteristics: Accredited investors are considered to have the experience, knowledge, or resources to understand and handle the potential risks of these more sophisticated investments.
Retail investors typically invest in securities available to the general market, like stocks, bonds, mutual funds, CDs, and insurance. Institutional investors are like wholesale buyers with greater access to investment options and can pick and choose from private and public funds. Accredited investors have the opportunity to invest in certain investments that are categorized as sophisticated, and have a complex set of risks.
