This article explains what institutional investors are, how they trade, and why they have so much influence in the market (with examples).
Institutional investors (professional entities that invest massive sums) are the biggest players on Wall Street, with over 80% of the market cap of U.S. equities in their control.
What does “institutional investor” mean?
The term “institutional investor” refers to an entity or organization (like a bank, pension fund, or insurance company)—that invests substantial sums of money in the securities marketplace on behalf of its constituents (members, clients, customers, etc.).
Institutional investment entities are run by savvy professionals who have the best possible data at their fingertips, so where they go, ordinary investors and analysts follow. Additionally, some institutional players are accredited, which allows them access to unregulated securities that are out of reach for the average investor.
Why Are Institutional Investors Important? How Do They Impact the Market?
Institutional investors are the movers and shakers of Wall Street—since they buy and sell stocks and other financial instruments in massive amounts, their trading decisions have a far more noticeable impact on asset prices than those of retail investors.
For instance, if a large institutional investor sells 20,000 shares of Stock A, supply suddenly increases relative to demand, driving the price of the stock lower. If the same investor buys 20,000 shares of Stock B, supply suddenly decreases relative to demand, driving the stock’s price higher. When many institutional investors make similar trades over a short period of time, the resulting price swings can be dramatic.
According to a 2013 speech by former Commissioner Luis A. Aguilar of the Securities and Exchange Commission, institutional investors managed 67% of the U.S. equities market by 2010. An article in Pensions and Investments states that institutional investors owned 80.3% of the S&P 500’s market cap as of April 2013. This means that by and large, institutional investors control most of Wall Street.
10 common types of institutional investors
- Banks/credit unions
- Mutual funds
- Hedge funds
- Venture capital funds
- Pension funds
- Endowment funds
- Commercial trusts
- Real estate investment trusts (REITs)
- Insurance companies
- Charities
Institutional investors vs. retail Investors: What are the differences?
At a basic level, institutional and retail investors are similar in that they both buy, sell, and trade securities with the hope of making money. In practice, however, institutional investors have far more information, power, and options than ordinary individuals.
| Institutional Investors | Retail Investors | |
|---|---|---|
Purchasing power: | Massive | Minimal |
Influence on market: | Major | Minor |
SEC restrictions: | Fewer | More |
Experience: | Professional | Amateur |
Resources: | Many | Few |
Percentage of market by market cap: | More than 80 | Less than 20 |
Can (and should) you invest like an institution?
While retail investors don’t have access to as diverse an array of securities as institutional investors do, they can “follow the money” to a certain degree. Building a portfolio of stocks that have a higher-than-average level of institutional ownership is certainly a strategy that some traders use to their advantage. After all, if the so-called “smart money” favors certain stocks, shouldn’t buying those stocks be a no-brainer?
The reality is a little more complicated—institutional investors often open and close positions suddenly based on new information, and this makes stocks with institutional ownership volatile—if a number of big players all sell the same stock around the same time, its price can plummet rapidly, and by the time a retail player with the same holding finds out what’s going on, the value of their position could be decimated.
That being said, buying stocks that have a fair degree of institutional ownership isn’t a bad idea so long as the underlying company has strong prospects and healthy fundamentals (and you plan to hold it long enough to weather any short-term volatility).
Nasdaq maintains a page that allows users to view the institutional holding information of a stock by searching for its ticker symbol—this is a great place to start for those interested in learning more about where the institutional money in the equity market is.
Frequently asked questions (FAQ)
Below are answers to some of the most common questions investors have about Wall Street’s institutional players that were not already covered in the sections above.
Do institutional investors use brokers?
Yes, institutional investors, like retail investors, use brokers to execute trades. Because their clients move so much money through them, the brokers that serve institutions typically offer more services and lower fees than those that serve individual investors.
Can institutional investors trade pre-market and after-hours?
Yes, like individual investors, institutions can make trades both pre-market and after-hours.
Do institutional investors trade crypto?
Yes, many institutional investors now incorporate cryptocurrencies in their portfolios.
How many institutional investors are there?
According to Statista, there were about 2152 active institutional investors in the United States as of 2018. Of these, the bulk were located in New York (591) and California (362).
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