An institutional investor (II) is a large entity with access to a substantial pool of funds used for investments. Institutional investors make investments on behalf of others, and they are a major force in the market, accounting for over 70% of the trades on any given day in most financial markets. A closely related concept is a foreign institutional investor (FII), an entity which makes investments in a foreign financial market, as in the case of a British institutional investor investing in India.
Investment banks, brokerage houses, mutual funds, insurance companies, college endowment funds, pension funds, and hedge funds are all examples of institutional investors. These organizations pool financial contributions from large numbers of people, making investments in the market on behalf of the people who have contributed to the fund. For example, a pension fund collects contributions from employees and union members and invests them together. Investment choices are dictated by employees of the investment firm, and these employees use a variety of skills to determine how and when funds should be invested.
The advantage to having access to substantial financial backing is that an institutional investor can create a very diverse portfolio, which will strengthen its financial position. Because these investors deal in large amounts of money, they also receive preferential treatment and can be eligible for special rates which are not made available to members of the general public. Institutional investors can also have a tremendous influence on the market and the solvency of individual companies because they wield so much financial power.
Financial regulations are applied differently to institutional investors than they are to other players in the market. As a general rule, they are subject to less regulation, and they are not as protected as consumers are. Regulatory protections are deemed less necessary because institutional investors are supposed to police themselves and manage their investments wisely, although this approach to regulation has not necessarily been embraced by everyone concerned with financial markets.
For people who are not experienced in the market, working with an institutional investor can generate a better return on investments than investing independently. Institutional investors protect their customers from the vagaries of the market, and can sometimes generate very high returns. However, lack of control over investments also means that consumers will not be able to shape the direction of their investments, and this could expose them to risks if the firms which invest on their behalf fail to identify market trends.
