Institutional Investors

November 23, 2010Investingby EconomyWatch

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Institutional investors are organizations, such as life insurance companies and mutual and pension funds, that invest in various firms by pooling a large sum of money from individual investors. These firms act on behalf of the people who have contributed the money.

Since institutional investors deal in large numbers, they receive preferential treatment and need to pay lower commissions than individual investors. Moreover, these investors generally need to deal with fewer regulations and participate in the private placement of securities by companies. For participating in such placements, these investors need to be accredited investors, such as:

  • Banks, insurance companies, registered business development or investment companies.

 

  • Employee benefit plans.

 

  • Organizations with assets greater than $5 million.

 

  • Individuals with over $200,000 in annual income over the past couple of years and expecting the same in the current year.

Institutional investors are known for their ability to protect themselves, with their comprehensive field knowledge, rather than through protective regulations.

Advantages of Institutional Investors

Investments through institutional investors have the following advantages:

  • Safe investments owing to their vast domain knowledge.
  • Lower risk than that faced by non-institutional investors owing to a broad and diversified investment portfolio.
  • Active involvement and influence in corporate governance.
  • Ability to influence a company’s solvency (capability to meet financial obligations).
  • Influencing the conduct and capital requirements of listed companies.

Institutional Investor Types

Some of the key institutional investors are:

  • Pension funds: Legal entities formed by pension money. The sole aim of these entities is to finance pension plan benefits.
  • Mutual funds: A collective investment scheme that collects money to invest them in bonds, stocks, money market instruments and other securities.
  • Investment trusts: Close-ended funds that devote investor money (collected through the issuance of shares) in forming a diversified portfolio focused on company stocks.
  • Investment banks: Financial institutions that help corporations and the government to raise capital, trade in securities, and manage corporate mergers and acquisitions.
  • Hedge funds: Investment funds accessible to investors allowed to participate in a broad range of investments, such as shares, debt and commodities, and trading activities.

Popularity of Institutional Investors

Different types of institutional investors are popular in different countries. For instance, developed nations have pension funds as the popular investor choice, while sovereign wealth funds are popular in most oil-exporting countries. Examples of popular Canadian institutional investors are Caisse de dépôt et placement du Québec, Canada Pension Plan and Ontario Teachers' Pension Plan.

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