Definition
The term institutional investor refers to organizations that trade in securities in such high volumes that they qualify for lower commissions. Institutional investors provide financial services to customers and may be classified as non-bank financial institutions.
Explanation
A non-bank financial institution (NBFI) provides financial services, but is not a licensed bank and does not accept deposits from customers. While an institutional investor may be a bank, they are typically operating as bank holding companies, pension funds, hedge funds, and mutual funds.
These investors pool the assets of their clients, thereby increasing their ability to trade securities in quantities such that commissions are lower than those offered to individual investors. They may also be offered preferential treatment with respect to speed of trade. Institutional investors can influence the decision making process of corporations, especially in terms of a dividend policy. For example, if the institutional investor is in possession of a large number of the corporation's common stock, they may also exercise their voting rights to influence the thought process of the company's board of directors.
Related Terms
- The term retail investor refers to an individual that purchases or sells securities on behalf of their personal account. Unlike institutional investors, retail investors do not provide financial services to customers.
Moneyzine EditorSeptember 21st, 2023 - The term retail fund refers to a mutual fund that caters to the needs of individual investors and is sold through brokers. The characteristics of retail funds include low minimum investment thresholds and relatively high operating costs.Moneyzine EditorSeptember 21st, 2023
The term institutional fund refers to a mutual fund that caters to the needs of high net worth individuals, pension funds, and endowments. The characteristics of institutional funds include both lower operating costs and high minimum investments.Moneyzine EditorJanuary 22nd, 2024
