What Is an Institutional Investor?

Institutional investors are organizations or legal entities that engage in market trading on behalf of clients, which may include retail investors. They are often referred to as stock market "elephants" because of their outsized influence on prices, trading in large volumes every day.

Role and Share of Institutional Investors in the Market The role and share of Institutional investors has experienced huge growth in the last decade. Currently, they control more than 70% of the trading volume of almost all asset classes.

These investors not only trade with their own money, but also make profits from clients' investment portfolios. Recent changes in market structure introduced by the rise of quantitative and algorithmic trading have further emphasized the need for institutional investors.

They manage several funds simultaneously and act as a unified investment vehicle. With a skilled team monitoring continuous shifts in market indices and explaining market fluctuations, institutional investors are more skilled at trading when the time is right, without being exposed to the same risks as retail investors.

Compared to retail investors, Institutional investors are more capable and experienced navigators of financial instruments. One advantage is having sell-side analysts provide valuable consensus estimates, helping them make decisions that can increase the value of the portfolio in the long term.

Institutional investors trade in large volumes and thus have the ability to influence price discovery mechanisms and contribute to market growth. The combined money introduced by these investors is very important to the market.

It is generally accepted that Institutional investors, as legal entities, are less likely to violate legal compliance. By being more experienced, they are less prone to risk and know how to use their stop-loss orders in a timely manner, minimizing losses.

Types of Institutional Investors There are many, the six main types are:

1. Insurance company: Investments include pooled premiums from various clients in exchange for health coverage, etc., with claims paid directly from the investment portfolio.
2. Investment Funds: This is a diversified form of investing in which a professional manager handles a pool of investments, with each contributing investor having varying percentage ownership. Often chosen by novice investors, investment funds usually deal in liquid assets on a long-term basis.
3. Hedge Fund: Using aggressive strategies to beat competitors and using maximum leverage, hedge funds are essentially pooled investments where the manager acts as the general partner and the investors become limited partners. Liquid assets are widely traded in hedge funds.
4. Bank: Banks, including commercial and central, invest on behalf of their clients, for example bonds, private equity funds, etc.
5. Credit Union: This is a financial organization that offers shares that can be purchased at a predetermined rate by its members. Profits are earned by members, who are also owners of the organization.
6. Pension fund: This is a pool of investments, contributed by private and public sponsors that covers the retirement of selected beneficiaries.

Difference between Institutional Investors and Retail Investors?

Retail investors are not restricted by any particular rules and can choose to invest in any portfolio they deem appropriate. An individual, small stock investor, can also focus on short-term investments with faster returns. In contrast, Institutional investors are more goal-oriented and prefer long-term capital investments.

Retail investors prefer to play it safe. Volatile markets may scare individual investors, but large institutional investors prefer to take advantage of the fluctuations to maximize profits. Market navigation by institutional investors is programmed by sell-side analysts and other experts.

In contrast to retail investors, institutional investors can obtain and manage greater market activity.

Acquisition of diverse assets is possible for institutional investors and impossible for retail investors. The former has the advantage of preferential market treatment and looser regulations and is better able to obtain foreign securities and other facilities.

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DISCLAIMER: This article is informational in nature and is not an offer or solicitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.