Loading the player...

What is an 'Institutional Investor'

An institutional investor is a nonbank person or organization that trades securities in large enough share quantities or dollar amounts that it qualifies for preferential treatment and lower commissions.

BREAKING DOWN 'Institutional Investor'

An institutional investor is an organization that invests on behalf of its members. Institutional investors face fewer protective regulations because it is assumed they are more knowledgeable and better able to protect themselves. There are generally six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds and insurance companies.

Resources of Institutional Investors

Institutional investors have the resources and specialized knowledge for extensively researching a variety of investment options not open to retail investors. Because institutions are the largest force behind supply and demand in securities markets, they perform the majority of trades on major exchanges and greatly influence the prices of securities. For this reason, 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. Retail investors typically do not invest in the same securities as institutional investors to avoid paying higher prices for the securities.

Retail Investors vs. Institutional Investors

Retail and institutional investors invest in bonds, options, futures contracts and stocks. However, because of the nature of the securities and/or the manner in which transactions occur, some markets are primarily for institutional investors rather than retail investors. Examples of such markets primarily for institutional investors include the swaps and forward markets. Retail investors pay brokerage firm fees along with marketing and distribution costs for each trade. In contrast, institutional investors send trades through to exchanges independently or through intermediaries; they negotiate a fee for each transaction and avoid paying marketing and distribution costs.

Retail investors buy and sell stocks in round lots of 100 shares or more; institutional investors buy and sell in block trades of 10,000 shares or more. Because of the larger trade volumes, institutional investors avoid buying stocks of smaller companies and acquiring a high percentage of company ownership. The investment cannot be sold when desired for little or no loss in value, and performing such an act may violate securities laws. For example, mutual funds, closed-end funds and exchange-traded funds (ETFs) registered as diversified funds are restricted as to the percentage of a company’s voting securities the funds can own. Conversely, retail investors find small companies’ lower stock prices attractive; they can invest more diversified portfolios in smaller price ranges than larger ones.

  1. Institutional Fund

    An institutional fund is a fund with assets invested by institutional ...
  2. Retail Investor

    Individual investors who buy and sell securities for their personal ...
  3. Block House

    A brokerage firm with the primary focus of locating potential ...
  4. Financial Institution - FI

    An establishment that focuses on dealing with financial transactions, ...
  5. Correspondent

    The name given to a bank, broker, dealer, or financial institution ...
  6. Institute Of Petroleum - IP

    The Institute of Petroleum (IP), based in the United Kingdom, ...
Related Articles
  1. Trading

    What is the Difference Between the two?

    The differences between retail and institutional traders lie in the size of the trade, level of sophistication, and the speed of transactions.
  2. Investing

    Introduction To Institutional Investing

    Investopedia explains: Learn about institutional investing and all of the major players in this field.
  3. Investing

    Institutional Investors And Fundamentals: What's The Link?

    Big-money sponsorship might make a company look good, but it's not always a reliable gauge of stock quality.
  4. Investing

    The Pros And Cons Of Institutional Ownership

    These big players can both create and destroy value for shareholders.
  5. Investing

    5 Common Pitfalls of Copycat Investing

    Learn about the dangers of copying another well-known investor's portfolio, known as copycat investing. Find out some pitfalls to this risky approach.
  6. Investing

    iShares Silver Trust ETF: Who Is Invested? (SLV)

    Discover the top institutional owners of the iShares Silver Trust exchange-traded fund (ETF), their exact ownership and their recent position adjustments.
  7. Investing

    Will Institutional Investors Change the Way Hedge Funds Invest?

    As market volatility rises, hedge funds could be capitalizing, but institutional investors may be holding them back.
  8. Investing

    Institutional Investors Shift to Actively Managed Accounts in Face of Volatility: Natixis

    Volatility is back, and institutional investors are preparing for it by shifting some allocation to actively managed investments.
  9. Investing

    4 Factors to Know About Money Market Reform in 2016 (FII, BAC)

    Learn more about the impending implementation of the money market fund reform, including how it impacts individual and institutional investors.
  10. Financial Advisor

    What to Tell Clients About New Money Market Rules

    New money market rules will have little impact on clients. Here's what to tell them if they ask.
  1. How Can Institutional Holdings Be More Than 100%?

    No entity can own more than 100% of a company's outstanding shares, but it can be reported that way. Read Answer >>
  2. What are the major categories of financial institutions and what are their primary ...

    Understand the various types of financial institutions that exist in today's economy, and learn the purpose each serves in ... Read Answer >>
  3. What are some examples of a Foreign Institutional Investor (FII)?

    Discover some examples of foreign institutional investors, and learn information about the nature of foreign institutional ... Read Answer >>
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center