What Is an Institutional Investor?
An institutional investor is a company or organization that invests money on behalf of other people. Mutual funds, pensions, and insurance companies are examples. Institutional investors often buy and sell substantial blocks of stocks, bonds, or other securities and, for that reason, are considered to be the whales on Wall Street.
The group is also viewed as more sophisticated than the average retail investor and, in some instances, they are subject to less restrictive regulations.
- An institutional investor is a company or organization that invests money on behalf of clients or members.
- Hedge funds, mutual funds, and endowments are examples of institutional investors.
- Institutional investors are considered savvier than the average investor and are often subject to less regulatory oversight.
- The buying and selling of large positions by institutional investors can create supply and demand imbalances that result in sudden price moves in stocks, bonds, or other assets.
- Institutional investors are the big fish on Wall Street.
The Role of Institutional Investors
An institutional investor buys, sells, and manages stocks, bonds, and other investment securities on behalf of its clients, customers, members, or shareholders. Broadly speaking, there are six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds, and insurance companies. Institutional investors face fewer protective regulations compared to average investors because it is assumed the institutional crowd is more knowledgeable and better able to protect themselves.
Institutional investors have the resources and specialized knowledge for extensively researching a variety of investment opportunities not open to retail investors. Because institutions are moving the biggest positions and are the largest force behind supply and demand in securities markets, they perform a high percentage of transactions on major exchanges and greatly influence the prices of securities. In fact, institutional investors today make up more than 90% of all stock trading activity.
Institutional investors account for about 80% of the S&P 500 total market capitalization, according to data from Pensions & Investment Online.
Since institutional investors can move markets, retail investors often research institutional investors’ regulatory filings with the Securities and Exchange Commission (SEC) to determine which securities the retail investors should buy personally. In other words, some investors attempt to mimic the buying of the institutional crowd by taking the same positions as the so-called "smart money."
Retail Investors vs. Institutional Investors
Retail and institutional investors are active in a variety of markets like bonds, options, commodities, forex, futures contracts, and stocks. However, because of the nature of the securities and the manner in which transactions occur, some markets are primarily for institutional investors rather than retail investors. Examples of markets primarily for institutional investors include the swaps and forward markets.
Retail investors typically buy and sell stocks in round lots of 100 shares or more; institutional investors are known to buy and sell in block trades of 10,000 shares or more. Because of the larger trade volumes and sizes, institutional investors sometimes avoid buying stocks of smaller companies for two reasons. First, the act of buying or selling large blocks of a small, thinly-traded stock can create sudden supply and demand imbalances that move share prices higher and lower.
In addition, institutional investors typically avoid acquiring a high percentage of company ownership because performing such an act may violate securities laws. For example, mutual funds, closed-end funds, and exchange-traded funds (ETFs) that are registered as diversified funds are restricted as to the percentage of a company’s voting securities that the funds can own.
What’s The Difference Between Institutional and Non-Institutional Investors?
What Is the World's Largest Asset Manager?
The largest private asset manager is BlackRock, which holds about $10 trillion in assets under management as of 2022. Note that most of these assets are held in the name of BlackRock's clients; they are not owned by BlackRock itself.
What Qualifies As an Institutional Investor?
An institutional investor is an entity that makes investments on behalf of someone else. Examples include pension funds, mutual funds, insurance companies, university endowments, and sovereign wealth funds.
How Do Institutional Investors Make Money?
Institutional investors make money by charging fees and commissions to their members or clients. For example, a hedge fund may charge a certain percentage of a client's investment gains or total assets. There may also be flat fees for holding an account or making trades or withdrawals.
What Is an Accredited Investor?
An accredited investor—sometimes described as a sophisticated investor—is someone with enough experience or wealth to make certain risky investments that are not permitted to the general public. In the United States, an accredited investor must have a net worth of over $1 million, excluding the value of their primary residence.
The Bottom Line
Institutional investors are the big fish on Wall Street and can move markets with their large block trades. The group is generally considered more sophisticated than the retail crowd and often subject to less regulatory oversight. Institutional investors are usually not investing their own money, but making investment decisions on behalf of clients, shareholders, or customers.