A legal entity that gathers funds from several investors to invest in various financial instruments
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What is an Institutional Investor?
An institutional investor is a legal entity that accumulates the funds of numerous investors (which may be private investors or other legal entities) to invest in various financial instruments and profit from the process. In other words, an institutional investor is an organization that invests on behalf of its members.
Key Highlights
- Institutional investors are legal entities that participate in trading in the financial markets.
- Institutional investors include the following organizations: credit unions, banks, large funds such as a mutual or hedge fund, venture capital funds, insurance companies, and pension funds.
- Institutional investors exert a significant influence on the market, both in a positive and negative way.
Types of Institutional Investors
There are several types of institutional investors, such as:
Institutional investors are entitled to preferential treatment and lower fees. They are also subject to fewer protective rules because they are more qualified traders than individuals and thus better able to protect themselves.
Impact of Institutional Investors
Often called market makers, institutional investors exert a large influence on the price dynamics of different financial instruments.
The presence of large financial groups in the market creates a positive effect on overall economic conditions. The institutional investors’ activism as shareholders is thought to improve corporate governance because the monitoring of financial markets benefits all shareholders.
In addition, institutional investors can access and know how to explore a variety of investment instruments not available for private investors.
Characteristics of Institutional Investors
The characteristics of institutional investors are the following:
- It is always a legal entity, and it is important to understand that an institutional investor is an enterprise managing a fund (e.g., a mutual fund), but not the mutual fund itself.
- The basis of an institutional investor’s activity is professional, and it manages assets based on the interests and goals of its clients.
- An institutional investor always manages a significant number of funds.
Individual Investors vs. Institutional Investors
An individual can invest in any assets that are available to them on the exchange. An institutional investor can also buy assets but is oriented more on long-term investing.
Institutional investors also access large operational activities due to corporate opportunities. With substantial capital and licensing, large institutions secure access to many assets that are not available to private individuals.
They include foreign securities, government business loans, changed banking policies, interest rates, and more. If individuals work as retail investors, institutional investors are more likely to conduct wholesale purchases.
Risks in Institutional Investing
Understanding the risks that institutional investors face is very important. Their problems can be classified as follows:
- Permanent risks of non-compliance with the legal rights of shareholders. They include a lack of qualified, experienced appraisers and a lack of a clear and well-established policy on the payments of dividends.
- Problems with the work organization of management structure and officials. The employment of managers and analysts is formal, and there is no model for determining the quality of their work. Such problems are also present in other divisions, such as top management or marketing.
Additional Resources
Expected Return
Equity Co-Investment
High Net Worth Individuals (HNWI)
Residential Properties REITs
See all wealth management resources
FAQs
There are several types of institutional investors, such as:
- Banks.
- Credit unions.
- Pension funds.
- Insurance companies.
- Hedge funds.
- Venture capital funds.
- Mutual funds.
- Real estate investment trusts.
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.
Is it good if a stock is owned by institutional investors? ›
One of the primary benefits of the institutional ownership of securities is their involvement is seen as being smart money. Portfolio managers often have teams of analysts at their disposal, as well as access to a host of corporate and market data most retail investors could only dream of.
What is a good percentage of institutional ownership? ›
What percentage of institutional ownership is normal? Because most stocks in the market are owned by institutions it is perfectly normal to see 70% or more of any individual stock to be held by institutional investors.
Who are the big three institutional investors? ›
The “Big Three” institutional investors, BlackRock, State Street Global Advisors and Vanguard, have significant influence on the environmental, social and governance (ESG) policies and related disclosure for public companies.
Which of the following are examples of institutional investors quizlet? ›
Banks, insurance companies and mutual funds are all institutional investors.
What are the top 5 institutional investors? ›
Managers ranked by total worldwide institutional assets under management
| # | Name | 2021 |
|---|
| 1 | Vanguard Group | $5,407,000 |
| 2 | BlackRock | $5,694,077 |
| 3 | State Street Global | $2,905,408 |
| 4 | Fidelity Investments | $2,032,626 |
6 more rowsThe difference is that a noninstitutional investor is an individual person, and an institutional investor is some type of entity: a pension fund, mutual fund company, bank, insurance company, or any other large institution.
Who is not an institutional investor? ›
Non-institutional investors (NIIs) are wealthy individuals, private companies, and trusts distinct from larger institutional entities.
What are the disadvantages of institutional investors? ›
Disadvantages Of Institutional Investors
Unable to invest in smaller companies: Retail investors generally have more ability to pursue profit opportunities in shares of smaller companies.
Institutions own about 78% of the market value of the U.S. broad-market Russell 3000 index, and 80% of the large-cap S&P 500 index. In dollars, that is about $21.7 trillion and $18 trillion, respectively.
What power do institutional investors have? ›
Voting Power: Institutional investors participate in shareholder voting on matters such as electing directors, executive compensation, mergers, and other critical decisions. Their votes can shape the outcome of these issues and hold management accountable.
How many homes in the US are owned by institutional investors? ›
Research by MetLife Investment Management suggests that, as of August 2022, institutions owned approximately 700,000 single- family rental homes. The increase in institutional investors began during the Great Recession, when housing prices dropped precipitously and credit tightened.
What is the average return of institutional investors? ›
In that environment, the median institutional investor produced 9.5 percent in annual returns from 2012 to 2021 (exhibit). Institutional investors we interviewed unanimously agree that the current environment is radically different from the global investment conditions of the previous three decades.
What does institutional ownership tell you about a stock? ›
Institutional ownership is the amount of stock owned by large entities that manage funds on behalf of others. Reputations of institutional ownerships can influence interest in a stock.
Is PE an institutional investor? ›
The private equity industry comprises institutional investors, such as pension funds, and large private equity firms funded by accredited investors.
Is Vanguard an institutional investor? ›
John James is managing director of Vanguard's Institutional Investor Group, which serves the investment needs of employers offering company-sponsored retirement plans, as well as organizations such as endowments and foundations.
Is Robinhood an institutional investor? ›
Robinhood Markets, Inc. (US:HOOD) has 631 institutional owners and shareholders that have filed 13D/G or 13F forms with the Securities Exchange Commission (SEC). These institutions hold a total of 689,841,530 shares.
Is Fidelity an institutional investor? ›
Fidelity offers a broad array of institutional investment strategies across asset classes.
