What is Institutional Investor?

An institutional investor is a legal entity or an organization taking part in the market trading on behalf of the clients, often retail investors. Institutional investors are considered the “elephants” in the stock market as they have a strong influence over the prices. They trade in massive volumes of assets daily, thus having a direct impact on the market price.

The role of institutional investors in the market has grown immensely over the past few years. They account for roughly 70% of the trading volume in nearly all asset classes. They do not put their own money into the trading but use the investment portfolios of their clients to make a profit.

The position of institutional investors was reinforced by the changes in the market structure, which saw the introduction of quantitative and algorithmic trading. Institutional investors can manage several funds at the same time, thus acting as vehicles of pooled investments.

Institutional investors are able to manage teams that analyze market shifts and trends to determine when the right time to invest is. Unlike retail investors that are exposed to more investment risk, institutional investors have better experience handling their financial instruments.

In many cases, institutional investors hire sell-side analysts who provide them with valuable data such as consensus estimates. This helps them to make investment decisions that are focused on long-term improvements of the portfolio value.

The trade volumes of institutional investors are so massive that they can affect the price discovery mechanism and the overall market growth. The pooled money that the investors bring into the market is critically important.

Institutional investors are seen as reliable, as in many cases, they are legal entities and, therefore, more likely to comply with laws and regulations. They have good market experience, are not as risk-prone as retail investors, and have good handling over the timing of their stop-loss orders, which minimizes possible losses.

There are six main types of institutional investors:

• Banks – banks are able to invest in bonds, private equity funds, and other assets on behalf of their clients; this includes commercial and central banks;
• Credit unions – financial organizations that allow members to purchase shares at predetermined rates. The members also act as owners of the organization and share the profit;
• Hedge funds – pooled investments that rely on strategies to help minimize competition and maximize leverage. They act as pooled investments where the manager plays the role of the general partner, and the investors act as limited partners. Hedge funds trade liquid assets;
• Insurance companies – organizations that trade the pooled premiums acquired from their clients for health or property coverage. The investment portfolio compensates the claims;
• Mutual funds – diversified investment companies. A manager is responsible for the investment pool. Each investor holds ownership of differing share percentages by contributing to the fund;
• Pension funds – investment pools that receive contributions from private and public sponsors. Pension funds are used to cover the years after retirement for beneficiaries who have opted into the fund.

While retail investors also play an important role in market trading, there are numerous notable differences between the two investor types. For starters, retail investors aren’t limited by tenets. They are able to make a decision on which portfolio they want to invest in.

Individual, small-scale investors are able to concentrate on short-term investments that grant them faster gains. Institutional investors tend to be more goal-oriented and employ trading strategies that focus on long-term investments in large capital.

Volatile markets can scare individual, small-cap investors from the market. Thus, retail investors are more likely to play safely in the field. Institutional investors are more likely to take advantage of the market swings to maximize their gains. The investment decisions are made based on information provided by side-sell analysts and financial experts.

Unlike retail investors, institutional investors are able to trigger and manage greater market activities. They can acquire multiple assets, which is not a possibility for retail investors. Institutional investors garner a far more preferential market treatment and are not subject to the same strict regulations.

Furthermore, it’s easier for institutional investors to acquire foreign securities and other assets.