Looking into the corporate world, especially Fortune 500 companies, there is a high probability that you will discover a list of investment companies, pension management firms, and the likes. These institutions handle funds to the tune of billions of dollars. The propelling power behind the trading and operations of these companies are the institutional investors.
The institutional investors play a significant role in the market capitalization of publicly traded companies such as those in the New York Stock Exchange. For instance, in 2012, the domestic market capitalization of the New York Stock Exchange (NYSE) was more than $14 trillion, while that of NASDAQ was about $4.5 trillion. Institutional investors come in different forms with each of them having its own unique characteristics. The investors also have different governance and organizational structures. This article will detail all there is to know about institutional investors.
Who Are Institutional Investors?
Institutional investors are not sole persons; rather, they are organizations that manage assets on behalf of others. They invest the assets in a number of different asset classes and financial instruments. The institutional investors have had a lot of influence over time. This is because when you compare their domestic market capitalization in the NYSE between 1950 and 2012, you will find that there is an increase of close to 1,500 percent.
The institutional investors have the reputation of being more adept at investing. Also, they deal with less protective regulations because of the professional nature of their operations. Moreover, they have a lot of access to public companies.
Who Needs Institutional Investors The Most?
Institutional investors possess the necessary resources and specialized know-how to carry out extensive research on a variety of investment options that are otherwise not accessible to retail investors. This means that they have an advantage over retail investors.
Portfolio managers regularly meet one-on-one with the business executives to study the whole industries. They also conduct a comprehensive evaluation on companies before they come up with resolutions for certain investments.
Why Do Institutional Investors Matter?
Almost all of the institutional investors in the United States are regulated by the Securities and Exchange Commission (SEC). Furthermore, they need to fill a Form 13F with the SEC to report their quarterly holdings. Moreover, if they own more than 5 percent of a company’s stock, they have to fill a Form 13G.
It is imperative to note that institutions have a lot of influence on the supply and demand balance in the securities market. This means that they control the prices of most securities. Meanwhile, they are not forgetting that most of the major exchanges in the securities market are carried out by the institutions. Besides influencing the supply and demand of securities, institutional investors are also able to influence the prices of securities greatly because of the humongous size of their portfolios.
The core objective of institutional investors is to buy and sell stocks. They matter most because they purchase undervalued stocks and they ensure that when they sell them in the future, the stocks have gained value. In order to do this, the institutions have to employ skilled analysts and specialists to carry out comprehensive research on high quality information about certain companies. The institutional investors also ensure to hold meetings often with executives of the companies they would like to invest in. These meetings aim to identify the best prospects so that the share value improves.
5 Major Types of Institutional Investors
There are a number investors. They include pension funds, closed and open-end investment companies, insurance companies, saving institutions, and foundations.
1. Pension Funds
- Pension funds hold the largest share of the institutional investors’ community because they have control of more than $10 trillion, which is about 40 percent of all professionally managed assets.
- They are paid either by public or by private sponsors and individuals and part of their package deal involves paying retirement benefits later on to the beneficiaries of the capital.
- Pension funds can assign resources to small portions of their portfolio investment to the retail investors.
2. Investment Companies
- Investment companies come second in size after pension funds. The investment companies offer professional services to individuals that would like to invest their funds and banking institutions.
- They are either closed or open-end mutual funds. The latter involves constantly issuing new shares as it gets funds from investors. Meanwhile, the former entails issuing a specific number of shares and trades on an exchange
3. Insurance Companies
- Parts of the institutional investors are also insurance companies. The insurance companies control about as much money as the investment companies.
- The organizations under insurance companies include life insurance and casualty insurance companies. These institutions operate by taking premiums to offer coverage to policyholders against certain risks.
- The insurance companies invest in the premiums, implying that their profits come from investing premiums. The companies use the profits to pay for future claims.
4. Saving Institutions
- Saving institutions have in their control more than $1 trillion in assets.
- They are not such a popular option because they have experienced quite a huge decline in their assets. Research indicates that their assets dropped from 32.6 percent in 1980 to a mere 4.9 percent in 2009.
- Foundations have the fame of being the smallest institutional investors. This is because they are funded solely for the welfare of other people rather than the profitability of the investors.
- Wealthy families and multi corporations create foundations with the intent of serving a particular public purpose.
- Foundations are all about the happiness of society. Those institutions create them to provide better access to education, healthcare, and public services.
In the End
Institutional investors are non-banks and/or organizations that trade securities in large quantities on behalf of other investors. The institutional investors have a lot of influence in the security market because of their size and access to companies and management in publicly traded companies.
The main types of institutional investors include pension funds, investment companies, insurance companies, saving institutions, and foundations. These institutions control a significant amount of financial assets, and they are considered more adept at investments.