What is an institutional investor?
Here’s the quick definition for an institutional investor: It’s an organization that buys and sells stocks, bonds, other securities, and assets like real estate for organizations and other people. Institutional investors are different from retail investors who buy and sell securities and assets for themselves and make the majority of trades on the market.
There are various types of institutional investors:
- Endowment funds.
- Insurance companies.
- Hedge funds.
- Mutual funds.
- Pension funds.
If you invest in a REIT, for example, that organization might invest in income-producing real estate on your behalf. That improves market access, accountability and price discovery. The organization makes investment decisions for all its members and shareholders. Institutional investors don’t typically invest their own money.
Retail investors often buy and trade shares in small companies or purchase fractional shares. However, institutional investors tend to stay away from stocks in smaller companies because that can create imbalances in supply and demand, which can significantly move share prices.
Institutional investors have fewer protections than retail investors. That’s because these organizations typically have more knowledge and experience in the market. Institutional investors are so influential, they make up the majority of stock trading volume, which can distort the market and even impact the economy. They usually manage a large portfolio and can access investment opportunities unavailable to the general public. These investors get preferential treatment in the market and often pay lower fees than individual investors.
Some of the benefits of working with an institutional investor include access to a professional organization that can monitor your entire portfolio. As a result, you won’t have to track share prices or constantly follow the markets. Institutional investors also allow for investment diversification. These organizations can invest in various asset classes for you instead of single stocks, bonds or other securities. An organization will charge you a fee for any profits you generate.
In recent years, institutional investors have managed non-traditional investments such as cryptocurrency.
Institutional investor case study
An investor in Seattle wants to invest in real estate and hires a REIT with years of experience in property markets. The REIT makes decisions based on the interests and goals of the investor. As the REIT has access to real estate investment opportunities not available to the public, the investor can generate lucrative returns over time and develop a diverse portfolio that comprises different assets.
The bottom line
Here is a plain and simple definition of what an institutional investor is: It’s an organization that manages securities and assets like real estate on behalf of an individual or another organization. An institutional investor makes investment decisions based on their experience, expertise, access to the markets and the goals and interests of the original investor. Institutional investors have fewer protections than individual investors and carry out large trades. They charge fees based on the profits they generate.