Explanation of Institutional Investors

Institutional investors are organizations or persons who trade securities with enough frequency and value to qualify for special benefits. These benefits include lower commissions when they trade through brokers and less regulation when they engage in complex trades. The Securities and Exchange Commission (SEC) sets a minimum trade limit each year that will qualify an individual or group as an "institution"; as of 2010, that limit was $100 million. Once a single investor reaches this limit, the investor can engage in more complex trades.

Examples of Institutional Investors

Institutional investors are typically actual institutions, such as insurance companies or pension funds, that represent a high number of individual investors. For example, a pension fund managed by a fund manager is seen as a sophisticated institution by the SEC and therefore by the market. Similarly, a college endowment may be an institutional investor. At the same time, a single person with $100M in the market at any given point qualifies as an institutional investor and will be treated as one by any broker, trader or clearinghouse.

Role of Institutional Investors

Institutional investors are extremely important to the market. They supply large amounts of capital funding to various businesses in need. Without these large investors, small, independent investors would not provide enough resources to support business development on a large scale. Further, institutional investors such as pension funds manage those investments of smaller, less sophisticated individuals. These people would not be able to choose proper derivatives, options and other complicated investments themselves. However, by investing in an institution, they can capitalize on the potential profits of riskier, more complicated investments by relying on a fund manager.

Significance of Institutional Investors

If you are not an institutional investor and are not involved in a large fund, you should still pay attention to institutional investors. On the whole, they are thought to be the most sophisticated group on the market. This means they can provide key insight into what will occur on the market at any given point. If an institution begins backing out of gold bonds, this may be an indicator you should do the same. The desire of the market to track institutional investors can also be problematic. If the institutions become too speculative and make poor decisions, as many did prior to the 2007 market collapse, less sophisticated investors may follow without understanding the risk of their investments. Institutions can cause bubbles through their actions if they are irresponsible.

Unique Rules for Institutional Investors

The SEC applies unique rules to institutions. For example, institutional investors can invest directly in foreign markets. Foreign companies not listed on any US market can specifically market to institutions. The SEC does not permit them to market to common investors because the SEC has not approved the foreign companies for entrance into the US market; this means the foreign companies may not hold to common accounting or other standards. The removal of this boundary for institutional investors is just one example of the access they have to more creative and riskier financial products.

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