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What is an institutional investor?

Institutional investor definition

An institutional investor is an entity that pools and invests money on behalf of its members in stocks, bonds, real estate and other investment assets. This type of investors is eligible to find investment opportunities with the aim of generating better-than-average market returns. Some of the most well-known institutional investors examples are hedge funds and mutual funds.

Institutional investors are required to obtain a licence from regulators such as the Securities and Exchange Commission (SEC). Every quarter they are liable to file a Form 13F to show their investment activities and current holdings.

Where have you heard about institutional investors?

If you are interested in the financial markets and follow the latest business news reports, the chances are you have come across this term. Large institutional investors usually get great media coverage as they hold a major portion of the stock market trading volume and play a key role in changing the markets’ overall moods and sentiments.

What you need to know about institutional investors...

Institutional investors are deemed to have more resources to do extensive research on a variety of investment options; those investors have specialised knowledge along with a better understanding of market sentiments compared to the retail investors. The portfolio managers of these institutions normally have the potential to meet with company executives, evaluate companies in depth and study entire industries before making any investment decisions. 

There are a few types of institutional investors, including:

  • Hedge funds;
  • Mutual funds;
  • Endowment funds;
  • Commercial banks;
  • Pension funds;
  • Insurance companies.

Institutional investors generally have several advantages over retail investors. For instance, they have a large amount of money when compared to retail investors – which they can allocate to various financial instruments and industries to reduce the risk.

Retail investors pay more in fees, commissions and distribution costs for each trade compared to institutional investors. On the other hand, institutional investors have the bulk of transactions, permitting them to negotiate and lower a fee for each transaction. On the New York Stock Exchange (NYSE), institutional investors account for about three-quarters of the total trading volume.

Institutional Investors also hold the majority stake in alternative investments due to their complex nature, degree of risk and lack of regulation. As institutional investor meaning suggests that it is an organisation, they always have a team that is responsible for looking at each feature of the markets that they trade in. Consequently, they appear in a better position to predict the market trend relative to retail investors.

Because institutions perform the bulk of trades on stock markets, they also have a significant influence on the prices of securities. The popular institutional investors stake in companies is considered a vote of confidence in future fundamentals.

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