What is an Institutional Investor?

By Patricia Miller

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An institutional investor is someone that invests money on behalf of other people. Examples include mutual funds, pensions, and insurance companies.

An institutional investor is a company or organization that invests money on behalf of other people. Examples include mutual funds, pensions, and insurance companies. Institutional investors tend to buy large blocks of stocks, bonds, and other securities.

They are considered to be more sophisticated and experienced than the average retail investors and for this reason can be less restricted by regulations as they are deemed to be able to better protect themselves.

How an institutional investor works

An institutional investor invests on the behalf of its clients to help them achieve their financial objectives. They are organizations that pool funds of those they act on behalf of to buy a variety of different financial instruments and asset classes.

Institutional investors control a vast amount of all financial assets in the United States and as such have considerable influence in all markets. They are considered to be more proficient at investing due to their professional status and have better access to companies owing to their size.

Institutional investors typically have access to explore a variety of investment instruments that are not available to private investors, they also have access to vital analytics tools and other resources to inform their decisions.

As the largest force behind supply and demand in the markets, institutional investors perform the majority of transactions on major exchanges and can significantly influence the prices of securities.

Types of institutional investor

Institutional investors are often categorized by the following types:

  • Banks

  • Credit Unions

  • Pension Funds

  • Insurance Companies

  • Hedge Funds

  • Venture Capital Funds

  • Mutual Funds

  • Real Estate Investment Trusts

What else to you need to know?

Given their influence on the market and the fact that they have access to large funds. institutional investors can often access opportunities that would not otherwise be available to private investors.

Plus, as experienced and professional investors, institutional investors can often achieve better return for their clients compared to if the client invested on their own.

However, investors in funds managed by institutional investors do not have a say in the companies that their funds are invested in, they are entirely in the hands of the institutional investor who will decide where to invest to achieve the best return.

Given their position to act in the best interest of the investors they are working for, it is considered that institutional investors can tend to play it safe by only investing in blue chip shares. As a result the shares of blue chip companies tends to be high. Institutional investors typically avoid investing in shares that are considered speculative.

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Author: Patricia Miller

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.