'Institutional Investor' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Institutional investors turn out to be organizations or occasionally individuals which buy and sell securities in huge enough quantities and currency totals. They benefit from lower fees and commissions as well as special treatment from the market makers.
These large and powerful deep pocketed investors experience fewer regulations from the regulatory agencies as well since they naturally assume that they have a larger knowledge base and are sophisticated enough to protect themselves in their investing strategies. There are many different kinds of investors who qualify as institutional investors. Some of them are life insurance firms and pension funds.
These entities derive their money from a variety of sources, but in all cases they pool the funds in order to buy and sell real estate, stock and bond securities, and other alternative types of investment classes such as loans, commodities, precious metals, and artwork.
There are many different kinds of institutional investors such as hedge funds, pension funds, insurance companies, sovereign wealth funds, commercial banks, investment advisors, Real Estate Investment Trusts, mutual funds, and university endowments. Other operating firms that choose to invest their extra capital in such asset classes are also covered by the term. Some institutional investors are activist. This means that they may interfere with the internal workings and governance of the firm by using their substantial voting rights in the companies in which they own larger stakes to influence corporate decisions, investments, and behavior.
Institutional investors act as intermediaries between smaller retail investors and corporations. They are also significant sources of critical capital for the financial markets. Since they pool together their member investment dollars or Euros, these larger and more powerful investors effectively lessen the cost of capital to entrepreneurs at the same time as the efficiently diversify their clients’ portfolios. Since they can impact the behavior of companies as well, this helps to reduce agency costs.
Institutional investors have several significant and game changing advantages over smaller, weaker retail investors. They possess enormous resources to invest as well as specialty knowledge that pertains to a variety of different investment options. Many of these choices are not even available to traditional retail investors at all. They also have longer term investing horizons as they are not limited to accumulation and distribution requirements of individual investors who will want to transition to retirement at some point.
Such institutions turn out to be the biggest movers and shakers within both supply and demand segments in the securities markets. This means that they transact the overwhelming majority of all trades on the major stock and bond market exchanges. Their choices and actions substantially impact the prices and bid/asks of most securities on the various markets.
This has led a number of retail investors to attempt to level the proverbial playing field of investing by researching the various filings of holdings the institutions make with the SEC Securities and Exchange Commission to learn what different securities they ought to invest in for their own individual portfolios and trades.
Some of these institutional investors are critically important in specific types of countries. For example, those countries which are oil rich and exporting nations generally contain one or more massive sovereign wealth funds which possess a lion’s share of the investable wealth of the nation. These are usually government controlled and administered institutional funds and investors.
They can amass even hundreds of billions of investable dollars, as have the Norwegian, Abu Dhabi, Saudi Arabian, Qatari, and Kuwaiti funds. In developed nations, it is the pension funds and insurance companies which control a substantial portion of the excess and readily deployable and investable capital.