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
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.
What is considered an institutional investor? ›
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.
What are the top 5 institutional investors? ›
Largest Institutional Investors by AUM
| Asset manager | Worldwide AUM (€M) |
|---|
| BlackRock | 4,884,550 |
| Vanguard Asset Management | 3,727,455 |
| State Street Global Advisors | 2,340,323 |
| BNY Mellon Investment Management EMEA Limited | 1,518,420 |
45 more rowsUnlike individual investors who buy stocks in publicly traded companies on the stock exchange, institutional investors purchase stock in hedge funds, pension funds, mutual funds, and insurance companies. They also make substantial investments in the companies, very often reaching millions in dollars in value.
What are institutional investors also known as? ›
Often called market makers, institutional investors exert a large influence on the price dynamics of different financial instruments.
Is a 401k an institutional investor? ›
A retail investor is an individual or nonprofessional investor who buys and sells securities through brokerage firms or retirement accounts like 401(k)s. Institutional investors do not use their own money—they invest the money of others on their behalf.
How much money does it take to be considered an institutional investor? ›
Institutional Investor vs. Retail Investor
| Institutional Investor | Retail Investor |
|---|
| Must have over $50 million in assets according to FINRA | No minimum investing requirement |
| Invests as a profession | Invests to fund goals such as retirement |
| Purchases or sales can affect stock prices | Likely doesn't have the ability to move markets |
1 more rowNov 17, 2023
Vanguard takes institutional lead over BlackRock
Vanguard Group surpassed BlackRock as the largest worldwide institutional money manager. BlackRock remains the world's largest asset manager overall.
Who are the three largest institutional investors? ›
Within the world of corporate governance, there has hardly been a more important recent development than the rise of the 'Big Three' asset managers—Vanguard, State Street Global Advisors, and BlackRock.
Is BlackRock an institutional investor? ›
The institutions we serve at BlackRock – from foundations to large pension funds – collectively serve hundreds of millions of people around the world. We're honored to work alongside them as they contribute to the financial futures of the people who depend on them. Capital at risk.
Institutional investors or professional investors are financial professionals who handle investments for corporations or other large organizations. In contrast, retail investors or private investors are individuals who invest independently based on their own personal choices and the funds available to them.
Is it good to have institutional investors? ›
Institutional investors tend to have more experience in the market and more knowledge. They may have access to investment research that retail investors do not and have financial resources that allow them to conduct their own research.
Who is a non-institutional investor? ›
What is NII? The full form of NII is Non-Institutional Investor. The term is used to represent a category of IPO investors who apply for more than ₹2 lakhs worth of shares in a public issue. The SEBI further categorises NIIs into two types - small NII (sNII) and big NII (bNII).
What is the opposite of institutional investor? ›
An institutional investor trades large volumes of securities on behalf of an individual or shareholder. This large-volume trade motivates brokerages to offer them lower fees. A retail investor is an individual who invests their own capital, typically at lower frequencies and volumes.
Who regulates institutional investors? ›
The SEC oversees the securities world and its participants, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud are core to the mission of the SEC.
Who owns BlackRock? ›
BlackRock is not owned by a single individual or company. Instead, its shares are owned by a large number of individual and institutional investors. The biggest institutional shareholders such as The Vanguard Group and State Street are merely custodians of the stock for their clients.
How to qualify as an institutional investor? ›
If you want to become an institutional investor, here are six steps you can take:
- Earn a degree. ...
- Complete an internship. ...
- Focus on an area of investing. ...
- Gain work experience with a financial institution. ...
- Network with other investment professionals. ...
- Participate in professional development.
Non-institutional investors that apply for shares via the book-building procedure up to 2 Lac only are known as retail investors and may be individuals, NRIs, or HUFs. In comparison to institutional investors, their purchasing power is very low, and they wind up paying large trading commissions or fees.
Is a PE fund an institutional investor? ›
Private equity can also come from high-net-worth individuals eager to see outsized returns. The private equity industry comprises institutional investors, such as pension funds, and large private equity firms funded by accredited investors.
