Institutional Investors Explained
Institutional investors are large investors that trade on behalf of others. Due to the size of their portfolios, institutional investors have a lot of influence over market prices.
kasto80/iStock via Getty Images
What Is an Institutional Investor?
An institutional investor is a professional who trades large volumes of securities on behalf of a corporation, organization, fund, or other individuals.
By comparison, a retail investor is a non-professional who trades for their own personal benefit. A retail investor may be active or passive and may trade through a full-service or discount broker, or they may use a financial professional for help.
Institutional Investor vs. Retail Investor
A survey in May 2022 by the Gallup Organization found that 58% of Americans own stock, a number slightly higher than the 56% who owned stock in 2021, and the 55% who owned stock in 2020. Retail investors differ from institutional investors in the following ways:
| Institutional Investor | Retail Investor |
| Trade money on behalf of others | Trade with their own money |
| Must have over $50 million in assets according to FINRA | No minimum investing requirement |
| Invest for a living | Invest to fund goals such as retirement |
| Purchases or sales can affect stock prices | Likely doesn't have the ability to move markets |
Institutional Investor Organizations
Institutional investors manage the assets of:
- Mutual funds
- Pension funds
- Hedge funds
- Endowment funds
- Banks
- Insurance companies.
Institutional investors make money either by charging their clients a flat fee or else by charging fees based on the value of the assets being managed. Below is a list of the top institutional investors ranked according to the amount of assets under their management, or AUM. Combined, the 10 largest institutional investors control greater than $40 trillion.
Source: advranking.com
1. BlackRock
Headquartered in New York City, U.S. with over $9.464 trillion in AUM. BlackRock manages the assets of companies, foundations, governments, and individuals, and it has more than 80 offices around the world. BlackRock is itself a publicly-traded company having a market capitalization of $117 billion as of March 31, 2022. In 2021, over a quarter of BlackRock's AUM was invested in ETFs through its iShares products.
Source: blackrock.com
2. Vanguard Group
Has its headquarters in Malvern, Pennsylvania, U.S., and it has $8.4 trillion under management. Unlike BlackRock, Vanguard is privately owned, and it has 20 offices worldwide. Vanguard is the second-largest provider of exchange-traded funds, and it is the world's largest provider of mutual funds, many of which boast low expense ratios. Today, Vanguard has more than 30 million investors in over 160 countries.
3. UBS Group AG
Headquartered in Zurich and Basel, Switzerland, UBS has $4.5 trillion under management. It provides products and services to corporate, institutional, and retail customers. UBS is publicly-traded on the Swiss Stock Exchange and the New York Stock Exchange, and it has a market cap of $55 billion.
4. Fidelity Investments
Headquartered in Boston, Massachusetts, U.S., privately-owned, Fidelity has an AUM of $4.5 trillion. With offices in North America, Europe and Asia, Fidelity provides investment services to financial advisory companies and brokers, and it boasts 38 million active brokerage accounts.
5. State Street Global Advisors Inc.
Headquartered in Boston, Massachusetts, U.S., State Street has an AUM of $4.14 trillion. The company provides services to foundations, endowments, governments, corporations, and financial advisors, and it offers over 140 exchange-traded funds, including the largest U.S. ETF. It also offers ETFs in Australia, Hong Kong, and Singapore.
6. Morgan Stanley
Headquartered in New York City, NY, U.S., Morgan Stanley has an AUM of $3.274 trillion. It has offices in 39 countries and, in late 2020, Morgan Stanley acquired the investment platform E*TRADE.
7. JPMorgan Chase & Co.
Headquartered in New York City, NY, U.S., JPMorgan Chase has an AUM of $2.996 trillion, and it is publicly traded on the NYSE under the symbol JPM. It offers products and services to corporations, governments, banks, brokers, insurance companies. JPMorgan is the number one credit card issuer in the U.S. with over $1.36 trillion in credit and debit card sales volume.
Advantages Of Institutional Investors
Institutional investors have the following advantages over their retail counterparts:
- Access to securities: Institutional investors may have access to securities that are not available to retail investors. For example, an initial public offering may only available to institutional investors who meet certain criteria.
- Access to information: They may have access to research, data, and analysis that is not be easily available to retail investors.
Disadvantages Of Institutional Investors
Institutional investors are at a disadvantage to retail investors in the following areas:
- Unable to play the long game: Institutional clients expect results quarterly or yearly, forcing institutional investors into more frequent trading, while retail investors are able to ignore short-term market movements.
- Unable to invest in smaller companies: Retail investors can invest in companies of any size, but because they have such large amounts of money to invest, institutional investors may be unable to invest in smaller companies because any purchases or sales will move share prices higher or lower.
- Diversification: This is often a mandatory requirement for institutional investors, while it is not for retail investors. While diversification can manage risk without reducing returns, a concentrated position in a few individual companies, while very risky, has the potential to significantly outperform the market.
- Liquidity: Retail investors can sell stocks and bonds quickly, while institutional investors may be bound by rules or agreements because their trades have a stronger effect on market sentiment.
- Taxes: Institutional investors have far greater tax reporting responsibilities than retail investors, who are only required to report their capital gains if they sell their investment at a profit.
Impact Of Institutional Investors on the Market
According to a 2021 study made by Morgan Stanley (reuters.com), institutional investors account for around 90% of the daily trading volume on the Russell 3000 index, which is the broadest major U.S. stock index. Because they control such a large portion of all U.S. financial assets, institutional investors have considerable influence over the markets for most asset classes, and over time, this influence has only grown larger.
A 2017 study in pionline.com found that institutional investors owned about 78% of the market value of the Russell 3000 index, and they owned 80% of the large-cap S&P 500 index. The estimated dollar values of those investments are around $21.7 trillion and $18 trillion, respectively. Institutional investors invest in a variety of assets, with the majority going to equities and fixed income, and lesser amounts to alternative investments, such as private equity, real estate, and hedge funds.
Because they buy and sell in such large blocks, institutional investors can create sudden price movements in stocks, bonds, or other assets. Every once in a while, when retail investors band together, they can triumph over institutional investors. Such was the case during the January 2021 GameStop "short squeeze" when retail investors pushed up the price of the gaming and consumer electronics retailer that large hedge funds had shorted, bringing several of the funds to bankruptcy.
Bottom Line
Institutional investors have an outsized influence over markets, and they own over 75% of the market value of the broadest equity index and account for 90% of the daily trading volume on that index. Retail investors can view the activities of institutional investors for clues as to future market movements, and when they band together, retail investors have proved that they can stand toe to toe with institutional investors.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.