How Retail Investors Can Compete Against Institutional Investors

Retail Investor vs Institutional Investor

Retail investors are always seen as the perennial underdogs against institutional investors. Indeed, institutional investors have significant advantages over the average man in the street. However, retail investors can still be successful and perform well in the markets, given the right knowledge and frame of mind.

What are Retail Investors Up Against?

Institutional investors are people employed by companies/organizations to make trades in the markets. These organizations include banks, insurance companies, mutual funds and hedge funds. With their large budgets, economies of scale and corporate connections, they are able to:

  • Obtain faster, more in-depth info
    • fundamental research in companies, sectors, economic trends
    • price-moving events in real-time
    • alternative economic indicators (eg. satellite images, railway traffic)
  • Invest in the best hardware and software
  • Trade more cheaply
    • their large volumes allow them to command lower fees
  • Hire good traders/investors with proven track records
  • Provide expensive/specialized training

Why Retail Investors Still Can Compete

There are several reasons why retail investors should still be able to compete with institutional investors despite their huge advantages listed above:

  • Complexity of the Markets
  • Size and Variety of Markets
  • Constraints of Institutional Investors
  • Agility and Flexibility of Retail Investors

Complexity of Markets

The markets are made of many moving parts. Many variables affect the price of assets, some are difficult to quantify while others may not even have an obvious relation to an asset. This underscores the difficulty of predicting asset price movements.

Major financial institutions have many years in the industry, and also possess some of the best talents. And yet they get their target prices for stocks wrong more often than they get it right. Since no one can very accurately predict stock prices, no one can dominate, and hence everyone in the game still has a chance.

Size and Variety of Markets

There are many asset classes in many markets, spread across many sectors and occupying different niches in their locale. New assets are being created everyday, adding to the colour and diversity of the markets.

With such a huge number of possible assets to trade or invest in, there would always be some which are not traded by institutional investors yet. Also, retail investors may be able to explore and find a niche in which they are familiar with and have an edge.

Constraints of Institutional Investors

Institutional investors invest/trade in huge amounts. This means that companies with small market capitalizations and those with low liquidity are not appropriate candidates for them.

They are also often not able to buy or sell stocks at one go, as their orders may fill up the current price level and slip into the next price level(s). They may need to split up into several different orders, sometimes across different days.

There may be mandates from management preventing them from investing in the stocks they prefer, for example ESG mandates. They may also need to buy an asset which they may not particularly like, perhaps for maintaining fund composition requirements.

Agility and Flexibility of Retail Investors

Retail investors deal in small amounts. They are able to invest in small cap and illiquid stocks. Their orders can be filled easily within the current price level, thus they have no problems buying/selling quickly.

They also do not have any constraints on the type of investments to make (eg. ESG mandates, fund composition). Also, there is no need to force a trade/sale if there are no good options around, they can wait until an opportunity arises.

What Retail Investors Can Do To Compete With Institutional Investors

Retail investors should aim to minimize the advantages institutional investors have over them, and maximize their own advantages over them.

  • Research to reduce information gap
  • Explore freely to find areas you perform well in
  • Be patient and do not force trades
  • Be nimble and react to fundamental changes quickly

Research to Reduce information gap

With the advent of the Internet, retail investors can now access a lot of information for free. They can diligently research on the stocks and sectors of interest to keep themselves updated. It is also useful for getting near real-time updates for time-sensitive trades.

Free information sources can probably give you about 60 to 70 percent of the info that institutional investors receive. To gain more specialized information, retail investors can subscribe to dedicated financial sites. Sometimes, this is necessary in order to gain more knowledge in depth in certain areas, and increase your chances of developing a trading/investing edge.

Explore freely to find areas you perform well in

Retail investors are free to try out any trading techniques and strategies in any areas of the market, without needing to seek permission and report results. They should keep learning about new assets and instruments, and not be afraid to try them out.

Be patient and do not force trades

Being able to wait for a while for a good trade will guarantee a higher probability of success than being forced to make suboptimal trades. Retail investors have the luxury of not making trades for weeks, months or even sometimes years. They should take advantage of this privilege to make fewer but higher quality trades. This will lead to a higher percentage of winning investments.

Be nimble and react to fundamental changes quickly

Retail investors can enter and exit a position easily in just 1 or 2 trades most of the time. Institutional investors trade in large sizes, and have to enter or exit a position gradually over time. This is to ensure that their trades do not cause prices to shift and cause them to transact at unfavourable prices.

This means that retail investors are a lot more agile, and can establish or exit a position much quicker, most often on the same day. In contrast, an institutional investor owning perhaps 10% to 15% of the entire company has to take some time to entirely dispose of a position.

Retail investors should regularly monitor news flow, and react decisively on any fundamental-altering event once some research has been done to ratify its legitimacy and impact. For example, if a major coal-using country decides to ban coal imports and make a major push towards natural gas and renewables, it would be optimal to cut positions in coal miners as soon as possible.


As of current market conditions, retail investors still have a good chance of doing well in the markets against the institutional investors. They just need to choose their battles well and be willing to put in time and effort to hone their edge.

This may change in the future, depending on how the nature of the markets changes and how unequally technology advancements benefit retailers/institutions. However, no one can predict the future accurately, so there is no need for retail investors to worry about it at the moment. The sun is still bright for them, so they can focus on making hay while the sun shines.