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? ›
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 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.
Who owns institutional investors? ›
Institutional ownership is the amount of a company's available stock owned by mutual or pension funds, insurance companies, investment firms, private foundations, endowments or other large entities that manage funds on behalf of others.
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.
Are institutional investors good or bad? ›
Institutional investors tend to have a significant advantage over individual investors in investment knowledge and research.
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.
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.
Is Apple an institutional investor? ›
Apple (AAPL) Ownership Overview
The ownership structure of Apple (AAPL) stock is a mix of institutional, retail and individual investors. Approximately 48.13% of the company's stock is owned by Institutional Investors, 0.11% is owned by Insiders and 51.76% is owned by Public Companies and Individual Investors.
Most institutional investors must register with the Securities and Exchange Commission and file regulatory forms both on an initial and ongoing basis. Mutual and exchange-traded funds must report their holdings multiple times per year, and hedge funds must report holdings above a certain dollar amount.
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).
Is a VC an institutional investor? ›
Institutional or traditional VC simply refers to investment firms which are backed by institutional investors such as financial institutions, banks, insurance companies, pension funds, university endowments, professional family offices, established companies or high net worth individuals (HNWI).
Is Berkshire Hathaway an institutional investor? ›
Berkshire Hathaway Inc. (US:BRK. A) has 1116 institutional owners and shareholders that have filed 13D/G or 13F forms with the Securities Exchange Commission (SEC). These institutions hold a total of 145,831 shares.
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.
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.
What is a qualified institutional investor? ›
A qualified institutional buyer (QIB) is a class of investor that can safely be assumed to be a sophisticated investor and hence does not require the regulatory protection that the Securities Act's registration provisions give to investors.
What is a qualifying institutional investor? ›
A company will be considered to be owned by qualifying institutional investors if such investors own the ordinary share capital of that company either directly or indirectly through one or more other companies. The ownership condition will be considered immediately before the disposal of the company's shareholding.
What is the difference between institutional and non-institutional investors? ›
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.
What is the difference between an individual investor and an 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.
