What is an Institutional Investor?

Put simply, institutional investors are institutions dealing in the trade of large quantities of securities. They are generally allowed special privileges, such as lower trading commissions as a result of the magnitude of their trades. They are also less subjected to investor-protective regulations, thus are better experienced and positioned to secure themselves. Below are the known categories of institutional investors:

• Commercial banking institutions
• Hedge funds
• Pension funds
• Insurance companies
• Endowment funds
• Mutual funds

What Does an Institutional Investor Do?

Equipped to perform a broad range of research on the various investment options that are usually not open to retail investors, institutional investors are experts in the investment domain as they have specialized skills and resources. They are also the biggest influencers of the supply, demand and market rates of securities. Because of this, retailers research their regulatory filings with the SEC to evaluate their trading investment options. Expectedly, to avoid paying increased prices due to high demand for those securities, retail investors avoid investing in securities the institutional investors are trading off. Even though retail and institutional investors invest in similar securities, there are usually differentiated by the nature of securities, i.e. swaps and forwards and the volume of transactions they undertake. On the one hand, retail investors invest in smaller companies and easily diversify their portfolios and sell their stocks in smaller price fluctuations. Institutional investors, on the other hand, invest in larger companies.