There are different types of investors. Institutional investors are one of them. It is a big institution that makes investment decisions for its clients. They are the market makers. But what makes them different from the normal investor? What is institutional investing? In this article, we will learn more about institutional investing.
What is institutional investing?
Types of institutional investing
Impact of Institutional Investing
Risks of Institutional investing
Individual Investors vs Institutional Investors
What is institutional investing?
An institution collects money from many investors. And invests it on the behalf of their clients. It is a company that manages funds. On behalf of their clients, they buy, sell, and manage assets. They put a significant amount of money into equities and bonds. They are in charge of millions of dollars. So, they are the whales of Wall Street. Institutional investors control more investment than individual investors. Because of this, they have access to more resources.
Institutional investors analyze the markets before investing. They are experts in the market and financial management. They use algorithms to buy and sell stocks based on market conditions.
Types of institutional investing
Mutual funds
A mutual fund means institutional investors collect and manage money from many investors. They invest it in various assets like stocks, bonds, and money market funds. Mutual funds diversify investment profiles.
Hedge funds
Hedge funds involve a high level of risk. Common people can not invest in hedge funds. Only institutions and big investors can invest in those. But it provides high returns as well. It has a wide range of assets. Also, they have liquidity.
Commercial Banks
Customers deposit their money in bank accounts like savings, fixed deposits, current accounts. Bank collects money and provides loans to other clients. They charge those customers’ interest. They invest this money into safe options like money market funds. Banks take limited risk as they have to protect your deposits.
Credit Union
The credit union is a non-profit organization. The members of the credit union company that owns and manages it. It offers high-quality services to its members. It includes savings accounts and loans.
Pension funds
The pension fund collects a certain amount of money from the salary of the employee. and after retirement, the employee gets it in a lump sum amount. They invest the collected money in capital markets such as stock or bond markets. Of course, the purpose is to increase the money’s value for retirees.
Impact of Institutional Investing
Institutional investors are market makers. These institutions conduct a large number of transactions. In fact, institutional investors handle more than 90% of total stock trading activity. Thus, they have a great influence on the supply and demand in the markets. They have a significant impact on the prices of securities. It creates a positive effect on overall economic conditions. The institutional investors analyze and study market conditions. It indirectly benefits all shareholders. This way it improves corporate governance.
Risks of Institutional investing
- There are some risks of institutional investing.
- Constant risks of failure to follow shareholders’ legal rights.
- There is a lack of qualified, experienced appraisers. Also, the dividend policy is not clear and well-established.
- Hiring managers and analysts are on a formal basis. There is no way to assess the quality of their job. Management and marketing departments also have similar problems.
Individual Investors vs Institutional Investors
- An individual investor invests their own money for personal profit. An institutional investor invests for their customers.
- Both Retail and institutional investors invest in assets like bonds, commodities, and stocks. But, some markets are for institutional investors rather than individual investors. This is due to the asset structure and transaction methods. Swaps and forward markets are two examples of markets for institutional investors.
- A person can invest in any asset available on the exchange. An institutional investor can buy assets as well. But their focus is on long-term investing.
- Large institutions have access to various assets that private persons do not have. It is due to their huge capital and license. Such as foreign assets, government business loans, new banking rules, interest rates.
In this article, we learned what institutional investing is. Institutional investors do not invest their own money. But rather make investments for their clients. Institutional investors are the big fish on Wall Street or market makers. They make large investments and deal with large amounts of money. Thus they influence the market. But there are many risks that institutional investors have to face.
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