Business, Legal & Accounting Glossary
An institutional investor is an organization that trades securities for investment purposes. An institutional investor can make investments utilizing its own assets. In addition, an institutional investor may invest on behalf of others with whom it has a fiduciary relationship. Investment companies, pension funds, mutual funds, insurance companies, and other organized investment entities may all be placed under the institutional investor category. Institutional investor organizations may even include endowments, charities, and universities. Institutional investor establishments hire professional analysts and advisors in order to hedge risk and generate stable returns. Because institutional investor firms generally operate with substation capital and trade in high volumes, they often tend to influence stock prices and company policies. A typical institutional investor is far less restricted in market action than an individual investor.
Institutional investors are non-bank organizations or individual entities that trade securities in large volumes. This huge volume of transaction entitles them for lower commissions and other types of preferential treatments. Institutional investors are faced with lesser protective regulations, as it is believed that they are more capable of safeguarding their financial interests as they are assumed to be more knowledgeable.
Some types of institutional investors are mentioned below:
Institutionalization of savings is a relatively new and significant financial market development. This is the direct fallout of the growth of institutions like mutual funds, pension funds, and life insurance companies.
Qualified professional portfolio managers nowadays manage a substantial portion of household savings (which were earlier held in bank deposits or directly invested in securities markets). It has been observed that the movement of individual savings towards institutional investors will be more pronounced with the aging of a nation’s population.
Institutional investors are increasingly becoming a force to reckon with in the international financial market. Assets under their management are very near in volume to those managed by banking systems. Institutional investors also help in better functioning of financial markets. They lead to a better allocation of savings. Majority of nations shifting towards funded pension systems have adopted a DC arrangement based structure. In recent years it has also been observed that institutional investors, worldwide have substantially augmented exposure to EMEs (emerging markets economies).
Different types of investment behaviour characterize different types of institutional investors. Investment behaviour is determined by the objectives and strategies of concerned institutional investors. Alternative investments are slowly gaining in popularity among traditional institutional investors like pension funds and life insurance companies. The growing importance of global institutional investors for emerging economies may have interesting connotations for transmission mechanism related to domestic monetary policy.
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This glossary post was last updated: 27th March, 2020