A nonbank individual or organization that trades significant quantities of securities. One is only considered an institutional investor if the volume of one’s trading is so significant (due to quantity of securities traded and/or dollars invested) that preferential treatment, fewer regulatory requirements, lower commissions and other benefits are triggered by that activity.
There are five primary kinds of institutional investors. These securities traders and organizations invest in securities on behalf of their individual members. They include: insurance companies, mutual funds, pension funds, endowment funds and hedge funds. Unlike retail investors, institutional investors generally have a great deal of resources at their disposal and apply specialized knowledge to their work. This specialized knowledge allows them access to limited markets (like swaps and forward markets) that are not generally open to retail investors. At present, institutional investors complete the majority of trades on major exchanges, so they exercise a significant amount of influence not just on the securities market specifically but on the economy as a whole.
In addition to perceived levels of sophistication and access to certain resources, there are some major differences between retail investors and institutional investors. For example, because institutional investors trade securities at high volumes, they usually purchase and sell in blocks of at least 10,000 shares at a time. By contrast, retail investors purchase and sell stocks in round lots of at least 100 shares at a time. Interestingly though, it is institutional investors who negotiate fees for each transaction and are able to avoid the kinds of distribution and marketing costs that accompany each trade a retail investor makes.
Husband: “Pack your bags, we’re going to Vegas!”
Spouse: “Really, that’s great! Why?”
Husband: “Because of how successful the hedge fund I manage has been this past year, I’m getting an institutional investor award for-“
Spouse: “I am going to need a LOT of alcohol to get me through this trip, aren’t I?”
Spouse: “Don’t get me wrong. I love you and am proud of you. Even if your job is insanely boring.”
Husband: “Aww. Thanks, honey.”