Institutional Investors: Definition & Impact To The Market (2024)

What Is an Institutional Investor?

An institutional investor is a major financial markets player with a large capital base and makes financial transactions on behalf of a corporation, organization, fund, or pool of other individuals.

By comparison, a retail investor is a non-professional who trades for their own personal benefit. A retail investor may be active or passive and may trade through a full-service or discount broker, or they may use a financial professional for help.

Institutional Investor vs. Retail Investor

A survey in May 2022 by the Gallup Organization found that 58% of Americans own stock, a number slightly higher than the 56% who owned stock in 2021, and the 55% who owned stock in 2020. Retail investors differ from institutional investors in the following ways:

Institutional Investor Organizations

Institutional investors manage the assets of:

• Mutual funds
• Pension funds
• Hedge funds
• Endowment funds
• Banks
• Insurance companies.

Institutional investors make money either by charging their clients a flat fee or else by charging fees based on the value of the assets being managed.

Examples of large institutional investors are Blackrock, Vanguard, UBS, Fidelity Investments and State Street Global Advisors.

Advantages Of Institutional Investors

Institutional investors have the following advantages over their retail counterparts:

• Access to securities: Institutional investors may have access to securities that are not available to retail investors. For example, an initial public offering may only available to institutional investors who meet certain criteria.
• Access to information: They may have access to research, data, and analysis that is not be easily available to retail investors.

Disadvantages Of Institutional Investors

Institutional investors are occasionally at a disadvantage to retail investors in the following areas:

• Unable to play the long game: Institutional clients expect results quarterly or yearly, forcing institutional investors into more frequent trading, and making it difficult for them to hold onto underperforming assets, no matter how bright the long-term prospects are.
• Unable to invest in smaller companies: Retail investors generally have more ability to pursue profit opportunities in shares of smaller companies. Instutitions and other large investors can invest in companies of any size, but smaller holdings may not be worth the effort given the limited size of potential $ profits. For example, a fund manager running a $5 billion fund may seek minimum positions of 2% within the fund, which is would equal a minimum investment of $100 million. But some entire companies have below market caps of $100 million, and even a $200 million company would require the institution to take 50% ownership, which would likely be prohibitively difficult without driving up the share price while acquiring the position. So institutions often opt-out of investing in very small companies.
• Diversification: Diversification is often a mandatory for institutional investors to mitigate risks, while retail investors can manage their portfolio however they wish. A heavily concentrated portfolio in just a few stocks, or a single industry, may enable potential outsized returns for individual investors.
• Liquidity: Retail investors can usually sell stocks and bonds quickly at the market price, but institutional investors may have more difficulty unloading a position onto the market where the size of the holdin exceeds buyer demand at the current market price.
• Taxes: Institutional investors have far greater tax reporting responsibilities than retail investors, who are only required to report their capital gains if they sell their investment at a profit.

Impact Of Institutional Investors on the Market

According to a 2021 study made by Morgan Stanley (reuters.com), institutional investors account for around 90% of the daily trading volume on the Russell 3000 index, which is the broadest major U.S. stock index. Because they control such a large portion of all U.S. financial assets, institutional investors have considerable influence over the markets for most asset classes.

A 2017 study in pionline.com found that institutional investors owned about 78% of the market value of the Russell 3000 index, and they owned 80% of the large-cap . The estimated dollar values of those investments are around $21.7 trillion and $18 trillion, respectively. Institutional investors invest in a variety of assets, with the majority going to equities and fixed income, and lesser amounts to alternative investments, such as private equity, real estate, and hedge funds.

Because they buy and sell in such large blocks, institutional investors can create sudden price movements in stocks, bonds, or other assets. Every once in a while, when retail investors band together, they can triumph over institutional investors. Such was the case during the January 2021 GameStop short squeeze when retail investors pushed up the price of the gaming and consumer electronics retailer that large hedge funds had shorted, bringing several of the funds to bankruptcy.

Bottom Line

Institutional investors are professionals who operate in financial markets. These investors have outsized influence over market prices. They may have advantageous access to securities and market information that retail investors do not.