Understanding Institutional Investors: Key Insights for Market Movers
An institutional investor refers to a company or organization that allocates funds on behalf of other individuals. Institutions such as mutual funds, pensions, and insurance companies are notable examples. Institutional investors frequently engage in buying and selling substantial quantities of stocks, bonds, and other securities, placing them among the most influential entities on Wall Street.
This group is perceived as more sophisticated than the average retail investor. As a result, they often adhere to less stringent regulations.
Key Takeaways
- Institutional investors invest on behalf of clients or members.
- Examples include hedge funds, mutual funds, and endowments.
- Typically more knowledgeable and subject to fewer regulations.
- Their large trades can significantly impact market prices.
- Known as the big fish on Wall Street.
The Crucial Role of Institutional Investors
Institutional investors engage in extensive buying, selling, and managing of various securities for their clients or members. There are six main types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds, and insurance companies. Due to their complex understanding and ability to protect themselves, institutions face fewer protective regulations compared to average investors.
Equipped with resources and expertise, institutional investors meticulously research numerous investment opportunities unattainable to retail investors. Their significant influence on supply and demand in securities markets leads to a high percentage of transactions on major exchanges, profoundly affecting security prices. Institutional investors now contribute to over 90% of all stock trading activities.
Over 80%
Institutional investors make up approximately 80% of the S&P 500 total market capitalization, as per data from industry sources.
Since these entities can sway markets, retail investors often scrutinize their regulatory filings with the Securities and Exchange Commission (SEC) to replicate the investment strategies of institutional players, also known as the “smart money”.
Retail Investors vs. Institutional Investors
Retail and institutional investors actively participate in markets such as bonds, options, commodities, forex, futures contracts, and stocks. Nonetheless, some markets, like swaps and forward markets, primarily cater to institutional investors. Retail investors typically trade stocks in round lots of 100 shares or more, whereas institutional investors engage in block trades of 10,000 shares or more. This often results in institutional investors avoiding the stocks of smaller companies due to potential price volatility and regulatory issues involving high ownership percentages.
What Distinguishes Institutional and Non-Institutional Investors?
Top Influencers: The World’s Largest Asset Manager
The largest private asset manager, BlackRock, manages approximately $10 trillion in assets as of 2022. These assets are largely held on behalf of clients, not owned by BlackRock itself.
Criteria for Institutional Investors
Typically, an institutional investor invests on someone else’s behalf. They rely on insights and data from analytical service providers to make shareholders’ informed decisions. Examples include pension funds, mutual funds, insurance companies, university endowments, and sovereign wealth funds.
Revenue Generation for Institutional Investors
Institutional investors earn by charging fees and commissions from their clients. For example, hedge funds may charge a percentage of a client’s investment gains or total assets, alongside flat fees for account management and transactions.
Understanding Accredited Investors
An accredited investor usually possesses the experience or wealth to undertake high-risk investments unavailable to the general public. In the U.S., an accredited investor must have a net worth exceeding $1 million, excluding their primary residence.
The Bottom Line
Institutional investors dominate Wall Street, wielding the power to move markets with their large trades. They are generally regarded as more sophisticated than retail investors, subject to lenient regulatory oversight. Operating predominantly with capital they manage for clients, shareholders, or customers, institutional investors significantly influence financial markets.
Related Terms: institutional investor, retail investor, hedge fund, mutual fund, pensions, endowments.
References
- Reuters. “Retail Traders Account for 10% of U.S. Stock Trading Volume—Morgan Stanley”.
- Pensions & Investments. “80% of Equity Market Cap Held by Institutions”.
- EDUCBA. “Institutional Investors”.
- ADV Ratings. “World’s Top Asset Managers”.
