Institutional investors dominate the market, with much higher trading power, volume, and sway than individuals who invest with their own money. As such, they exert a disproportionately higher influence on the market and economy. This guide will discuss the effects of big player moves and what institutional investments reveal about market trends and the economy.
What is institutional investing?
What is an institutional investor?
On the other hand, retail investors represent individuals who invest their own money. Due to the limited funds available for investment and less access to expert advice and software, retail investors are considered less sophisticated than their institutional counterparts.
To illustrate, institutional investing accounts for over 90% of stock trading volume. Due to their perceived expertise and financial leverage, they are allowed to participate in exclusive markets (like “dark pools”) and trade restricted financial assets such as pre-IPO stocks.
The impact of institutional investing on the market
The presence of Wall Street capital has grown enough to cause significant market moves to reshape the financial environment. For example, institutional investors trade up to ten or even a hundred times more shares per transaction than retail investors.
Opening or closing a position of that magnitude is like an elephant going through the rainforest: it bends the greenery and disrupts the established jungle trails. Depending on the direction of the trade, the stock price soars or nosedives. Whole sectors react to the influx or outflow of massive capital, and meeting or failing Wall Street’s expectations can decide the fates of many companies.
The shift of balance from retail to institutional investors
Institutional investors were not always the dominant force in the market. For example, in 1940, institutional investors like hedge funds and investment banks invested a total of $100 million in the U.S. economy, which was less than 1% of the total stock trading value. Over the decades, however, the big players grew and became more sophisticated.
Today, institutional investors make up over 90% of the stock trading volume, and global assets under management amounted to $98 trillion in 2023.
What can institutional investing reveal about the market?
Considering how institutional investing has grown to encompass most of the stock market, observing it for specific patterns can provide helpful insights about the market in general:
- Focusing on particular sectors and assets. Institutional investing can reveal underlying market trends depending on the hotspot sectors and types of assets. For example, increased investing in future and growth stocks indicates confidence that the economy will advance. Conversely, a shift to value stocks and conservative instruments like bonds and gold reflects anxiety about a potential downturn;
- Bullish and bearish sentiments in institutional investing. Tracking the direction of institutional funds can indicate Wall Street’s confidence in the market. For example, capital flight from hedge funds can signal market volatility. Similarly, if mutual funds’ and ETFs’ portfolios rebalance to include less equity and more fixed-income, they are likely readying for a market dip;
- Changing interest rates. Interest rates are vital in large-scale investing due to transaction volumes and viable financial horizons. Rising interest rates will see institutional investors shift from equity and real estate to liquid assets such as forex and short-term bills, while investing in illiquid assets like real estate can signal confidence in future growth;
- Hedge fund engagement. Due to their exclusivity and typically well-off clients, hedge funds tend to invest more aggressively than other investors. If they feel that a sector or company will drop, they will heavily short the stock with bearish expectations. On the other hand, if they commit to active investing in undervalued stocks, they might expect some market corrections;
- ESG investing. Some of the most prominent institutional investors, including BlackRock, the world’s largest asset manager, are increasingly adopting the principles of ESG investing. This reflects a shift in market sentiment from pure profits to a more environmentally, socially, and corporately aware mindset.
- Future technologies. Instances of institutional investors putting rising sums into high-growth sectors like AI and biotech tend to indicate confidence in innovation and technological advancement, possibly even upcoming future technologies like nuclear fusion and Metaverse.
Insider trading
What is insider trading?
Some studies have shown that institutional investors do not rely solely on their sophisticated tools and expertise. In fact, their unique position and connections in the financial world often provide them with access to insider information that can help them make an informed trading decision.
Recommended video: What is Insider Trading? Explained in 2 Minutes
While insider traders and institutional investors seem to be at odds, the fact remains that they compete against each other. Their rivalry frequently leads to a race to obtain insider information first.
Where are institutional investors putting their money?
We’ve already mentioned that institutional investors usually have favorites among stocks, industries, and sectors.
These are, without a doubt, companies in the technological sector, namely Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Meta (NASDAQ: META), Microsoft (NASDAQ: MSFT), and Nvidia (NASDAQ: NVDA). In fact, these are the top five holdings and the largest assets in the portfolios of the world’s largest and most successful institutional investors, such as BlackRock, Vanguard, and Fidelity Investments.
That said, these have not always been institutions’ favorite stocks. Technology was not the favorite sector either: previously, these were traditional finance and healthcare. Astute investors will continuously monitor institutional investors’ current focus and benefit from any perceived shifts before the general investing public.
Institutional investors favorites
Mass-trading models and strategies
Ultimately, we must mention large-scale trading models and investment strategies virtually exclusive to institutional investors due to their sheer price and availability. Nonetheless, they are reshaping the market and widening the gap between institutions and retail investors. These include:
- High-frequency microtransactions: The market does not self-regulate instantaneously, and institutional investors sometimes use hyper-speed algorithms to abuse fractional discrepancies in price that last only a fragment of a second;
- Mass-arbitrage: Big whales employ large-scale tools and software to cross-examine different markets and exchanges for differences, capitalizing on differences between parts of the global market;
- AI and advanced trading algorithms: Emerging AI technologies allow sophisticated institutions to deliver historical input on a massive scale and use the growing power of neural networks to accurately predict future market movements.
Due to the efficiency of these instruments and strategies, large institutional investors have leverage beyond the reach of retail investors. Many argue that mass-trading models and strategies violate trading ethics and introduce grand-scale market manipulations.
Whatever the case, the only way a retail investor can benefit from these powerful aids is to track institutional investments and indirectly leverage these tools.
The bottom line
Careful observation of institutional investments and their effects on market trends and the broader economy can bridge the gaping chasm between sophisticated institutional investors and individuals investing their own money.
Although it seems that institutions always stay two steps ahead, you can turn this to your advantage by carefully analyzing their investment strategies and replicating their most successful moves.
By relying on a service like Finbold Signals to deliver suitable forms and notify you about significant institutional investing developments, you can turn the ways of smart money into informed decisions that benefit your portfolio.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
FAQs
What is an institutional investor?
Institutional investor is a company or organization that pools funds and invests that money on behalf of other people in various assets and financial instruments, including stocks, bonds, real estate, and others.
Who are the key institutional investors?
The five largest institutional investors in the world are BlackRock, The Vanguard Group, UBS, Fidelity Investments, and State Street.
What do institutional investors buy?
Institutional investors represent the vast majority of stock market activity (over 90%), but they also invest in all other financial assets, such as real estate, commodities, and bonds.
What do institutional investments reveal about market trends and the economy?
Institutional investing can influence and reflect global market sentiment in many ways. For example, when big players pursue equity and real estate, this usually indicates bullish market sentiment. On the contrary, a run on fixed income and cash tends to follow a market downturn.
How to see what institutional investors are buying?
While you can manually browse through the financial reports on the SEC’s EDGAR repository to see what institutional investors are buying, it is easier and more efficient to use a stock trading tracker like Finbold Signals.
What are institutional investors looking for?
Institutional investors aim to provide their clients with returns on their investments. In fact, they usually take a portion of these earnings as commission.
Is it good if a stock is owned by institutional investors?
Institutional presence can benefit a stock, but its absence is not necessarily a bad thing. For example, institutional investors typically do not invest in small-cap companies. On the other hand, hedge funds tend to pursue an aggressive strategy, meaning that their position in a stock does not always mean less risk.
