An Institutional Investor is an organization or legal entity that trades in the market on behalf of its clients, including retail investors. These investors, often referred to as the “elephants” of the stock market, have a significant impact on prices due to their large trading volumes.
Institutional investors have seen substantial growth in their role and influence over the past decade. They now dominate more than 70% of the trading volume across various asset classes. Unlike retail investors, institutional investors do not trade with their own funds but generate profits from their clients’ investment portfolios.
The rise of quantitative and algorithmic trading has further highlighted the importance of institutional investors. They manage multiple funds simultaneously and serve as vehicles for pooled investments. With dedicated teams monitoring market indices and analyzing fluctuations, institutional investors are better equipped to make timely trades with lower risk exposure. They also possess greater expertise in navigating financial instruments compared to retail investors. One advantage they have is access to sell-side analysts who provide valuable consensus estimates, enabling informed decision-making that can enhance portfolio value in the long run.
Due to their ability to trade in large volumes, institutional investors have the power to influence price discovery mechanisms and contribute to market growth. The pooled funds introduced by these investors play a pivotal role in the market. Additionally, institutional investors, being legal entities, are generally more compliant with regulations. Their experience and expertise make them less susceptible to risks, and they know how to effectively utilize stop-loss orders to minimize losses.
There are several types of institutional investors, with the six main ones being:
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