An institutional investor is not actually one person. In fact, institutional investors are often organizations or companies that are investing a large amount of money on behalf of a group of people.
Mutual funds, pensions, endowments, and insurance companies are examples of institutional investors. Due to the sheer size of the trades many institutional investors carry out, they can sometimes move the market – depending on how volatile of an asset they are investing in.
The main thing that sets institutional investors apart from retail investors is the size of the trades institutional investors carry out. We’re going to talk about what it means to be an institutional investor in the first half of the article, and then the specific types of institutional investors in the second half.
Due to the fact that institutional investors have a larger amount of financial assets at their disposal, they can invest large sums of money into the stock market. For example, an institutional investor bought $100 million of preferred stock in this article here.
In fact, institutional investors own just about 80% of the market capitalization. It’s such a large portion of the market, that retail investors actually research institutional investor’s various strategies to see how they will impact the market.
Many institutional investors will not buy stock in small companies for this reason. While a substantial purchase of stock in an established company may move the stock price a little, a purchase of stock in a small company could completely disrupt the valuation of the company.
While there are often many regulations that come with trading for retail investors, such as how much money you’re allowed to invest, and what you can invest in. Institutional investors face far less restrictions and regulations than retail investors because they are more knowledgeable about the market.
For example, institutional investors are allowed to conduct much larger trades, such as Block Trades, than retail investors can.
Types of Institutional Investors
There are five main types of institutional investing that we will go over in the second part of this article: Pension funds, insurance companies, investment companies, saving institutions, and foundations.
Being the largest institutional investor type, pension funds had over $56 trillion in assets in 2020. Pension funds handle money in retirement accounts, and invest them to grow the money.
Investment companies are the second largest type of institutional investor, and they handle the money of various banks and individuals looking to invest their cash.
Private insurance companies in the U.S take in money from their clients and hold it for when they need to pay a premium back to their clients. While they hold the cash however, they invest it in various stocks and financial assets, making insurance companies a large institutional investor.
Savings Institutions accounted for just over $1 trillion dollars in 2019, and are institutional investors as well. Savings institutions must put the majority of their assets in very low risk investments.
The smallest type of institutional investing is foundations. They are created by a few wealthy companies or families in most cases, and have a specific purpose.
Institutional investors are organizations and companies, not individual people. They control a substantial portion of the equity market, around $90 trillion dollars. They invest large sums of money at a time, and can typically move the market when buying.
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