What is an institutional investor?

Institutional investors explained in under 4 minutes

Definition and Examples of Institutional Investors

An institutional investor is an entity such as a bank, insurance company, or securities broker that can invest large sums of money on behalf of its own portfolio or the portfolios it manages. In contrast, a retail investor is generally considered a typical individual investor who invests only for the benefit of their own portfolio. Let’s explore in detail what institutional investors are and how they differ from individual investors.

How Does an Institutional Investor Work?

Institutional investors often operate by having a large pool of funds to invest, either on their own or on behalf of others. For example, a pension fund may have billions of dollars pooled from those who contribute to the retirement system. The pension fund may then turn to professional institutional services from an asset manager rather than opening an online brokerage account like an individual retail investor does. A mutual fund can also be considered an institutional investor. Although investments in a mutual fund may come from retail investors, the mutual fund has large sums that can be invested collectively.

What Does an Institutional Investor Mean for Individual Investors?

Even though you may not be an institutional investor, it is likely that the institutional investor plays a role in your financial matters, whether it’s the bank providing you with financial services, the insurance company offering you an insurance policy, or the pension fund delivering your retirement payments. An institutional investor can directly impact an individual investor’s portfolio more when they manage an individual’s investments alongside the portfolios of other investors. For example, if you invest in a mutual fund, your returns will depend on how the institutional investor (the mutual fund) manages the equity in the fund.

Key Takeaways:

• An institutional investor is an entity like a bank, insurance company, or mutual fund that invests large sums of money.
• Institutional investors can invest their own money or on behalf of individuals.
• Compared to individual investors, institutional investors have access to more sophisticated services from financial service firms.

Sources:

• Legal Information Institute, Cornell. “Private Resales of Securities to Institutions.” Accessed Dec. 9, 2021.
• U.S. Securities and Exchange Commission. “Institutional Investors: Power and Responsibility.” Accessed Dec. 9, 2021.
• U.S. Securities and Exchange Commission. “’Accredited Investor’ Net Worth Standard.” Accessed Dec. 9, 2021.
• Center for Capital Markets: U.S. Chamber of Commerce. “The Role of Insurance Investments in the U.S. Economy,” Page 4. Accessed Dec. 9, 2021.

Source: https://www.thebalancemoney.com/what-is-an-institutional-investor-5212499