Welcome to the Advanced Stock Market Trading - Level 2. This lesson focuses on identifying institutional investor tactics and how to copy their strategies for better trading results.
An institutional investor is an organization or non-bank entity that trades securities in large volumes. These investors qualify for preferential treatment and lower commissions due to the size of their trades. They invest funds on behalf of groups or institutions, making them distinct from retail investors who trade for personal accounts.
These institutions control significant portions of financial markets and have access to resources and information not available to retail investors.
Institutional Investor Resources and Market Influence
Because institutional investors pool large sums of money, they have the resources to conduct in-depth research on investments unavailable to most retail traders. Their trades largely influence market prices, making their activity crucial to watch.
Retail investors often track institutional investors' filings with the Securities and Exchange Commission (SEC) to gauge market moves and select securities to buy.
Retail Investors vs. Institutional Investors
Both retail and institutional investors trade stocks, bonds, futures, and options. However, institutional investors transact in block trades of 10,000 shares or more, while retail traders typically deal in round lots of 100 shares or less.
Institutional investors benefit from lower transaction fees and better trade execution methods. They also avoid investing heavily in smaller companies due to liquidity concerns and regulatory restrictions on ownership percentages.
Advantages and Types of Institutional Investors
Institutional investors are generally more skilled due to their professional teams and privileged access to company management. Over time, increased transparency and regulation have narrowed some of these advantages.
Types of Institutional Investors:
- Pension Funds: Largest institutional investors controlling trillions in assets, focusing on long-term returns to pay retirements.
- Investment Companies: Including mutual funds and ETFs, these firms manage large pools of investor capital.
- Insurance Companies: Use premium income to invest and cover future claims.
- Savings Institutions: Once significant but have declined in market share.
- Foundations: Funded by wealthy families or corporations to support public causes.
Institutional Trading Tactics to Watch
Institutional traders use sophisticated and sometimes aggressive tactics to manage large trades and influence markets:
- Market Maker Calls: Institutions split large orders across multiple market makers to avoid flooding the market and crashing prices.
- Backdoor Deals: Special arrangements with market makers allow institutions to offload shares at prices below market, disadvantaging short sellers and retail traders.
- Limit Order Visibility: Institutional traders can see all limit orders on a stock, giving them an edge to run stop-loss orders or trigger false breakouts.
- Advanced Market Intelligence: Rumored high-cost services provide institutional traders with live audio feeds and insider insights that retail traders cannot access.
Conclusion
Understanding what is an institutional investor and the types of institutional investors is critical for advanced stock market trading. Institutional investors drive market supply and demand, use complex tactics to protect and grow their investments, and maintain a significant impact across all asset classes.
Learning to identify and mimic institutional strategies gives retail traders an edge in navigating the market more effectively. Try PROP365 today to gain access to advanced trading tools and insights that help you follow institutional moves and improve your trading performance.
