What Is an Institutional Investor?

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DEFINITION
An institutional investor is an entity like a bank, insurance company, or broker-dealer that can invest large sums of money for their own portfolio or for portfolios they manage.

An institutional investor is an entity like a bank, insurance company, or broker-dealer that can invest large sums of money for their own portfolio or for portfolios they manage.

In contrast, a retail investor is generally a typical individual investor who invests only for their own portfolio. Let’s explore in more detail what institutional investors are and how they differ from individual investors.

Definition and Examples of Institutional Investors

An institutional investor is an organization like a bank or insurance company that invests large sums of money toward its own financial goals or for portfolios it manages. The forms and characteristics of institutional investors can vary widely. They are regulated differently and invest in different assets toward their specific investing goals.

The legal definition of an institutional investor can also vary. For example, some may define it as an entity that invests more than $100 million in securities that aren’t affiliated with itself. 

What institutional investors have in common is that they are not individuals, but entities. They include:

  • Pension funds
  • Endowment funds
  • Sovereign wealth funds
  • Investment funds (e.g., a mutual fund or hedge fund)
  • Banks
  • Broker-dealers
  • Corporations
  • Insurance companies

Institutional investors often have millions or even billions of dollars to invest. Retail (or individual) investors, on the other hand, typically have much less.

High-net-worth, accredited investors straddle somewhat of a gray area between retail and institutional investors, as they may have millions to invest but not necessarily have the complexity that some institutional investors may have.

However, a high-net-worth investor can allocate to some types of institutional investors. These include hedge funds, which have minimum investment amounts and/or are only open to accredited investors (those who meet criteria, like having a net worth of more than $1 million, excluding a primary residence).

How Does an Institutional Investor Work?

An institutional investor often works by having a large pool of money to invest, either on its own or on behalf of others. For example, a pension fund could have billions of dollars collectively from those who contribute to a retirement system. The pension fund then might turn to professional institutional services from an asset manager rather than, say, opening up an online brokerage account as an individual retail investor might.

A mutual fund can also be considered an institutional investor. Even though the investments into the mutual fund might come from retail investors, the mutual fund then collectively has large amounts it can invest.

Being an institutional investor like a mutual fund can help when it comes to situations like engaging with companies whose stock the fund owns. Representatives from the company might be willing to meet with an institutional investor like a mutual fund that is a large shareholder rather than an individual who owns a small percentage of the company.

An institutional investor can invest its own money as well. For example, an insurance company uses the premiums from customers to invest and earn a return that it can use to pay out insurance claims.

Due to their size and complexity, institutional investors often receive separate, more sophisticated services from financial services firms. A bank, for example, generally wouldn’t provide the same service to an individual with $1,000 in a checking account that it would offer to an institution that has millions of dollars. The institution might have access to additional services ranging from securities lending to investment research support.

What Does an Institutional Investor Mean for Individual Investors?

While you may not be an institutional investor, chances are an institutional investor has played a role in your finances, whether it be your bank providing you financial services, an insurance company providing your policy, or a pension fund providing your retirement payments.

An institutional investor can affect an individual investor’s portfolio more directly when they are managing an individual’s investments along with other investors’ portfolios. For example, if you have invested in a mutual fund, your returns will depend on how well the institutional investor (the mutual fund) manages the fund’s holdings.

Key Takeaways

  • An institutional investor is an entity like a bank, insurance company, or mutual fund that invests large sums of money.
  • Institutional investors can invest their own money or on behalf of individuals.
  • Compared to individual investors, institutional investors can receive more sophisticated services from financial services firms.

Article Sources

  1. Legal Information Institute, Cornell. “Private Resales of Securities to Institutions.” Accessed Dec. 9, 2021.

  2. U.S. Securities and Exchange Commission. “Institutional Investors: Power and Responsibility.” Accessed Dec. 9, 2021.

  3. U.S. Securities and Exchange Commission. “’Accredited Investor’ Net Worth Standard.” Accessed Dec. 9, 2021.

  4. Center for Capital Markets: U.S. Chamber of Commerce. “The Role of Insurance Investments in the U.S. Economy,” Page 4. Accessed Dec. 9, 2021.