Banks, retirement funds, pension funds, mutual funds, hedge funds and insurance companies are some of the financial institutions which pool large sums of money to invest on behalf of others. Referred to as Institutional Investors, these funds are generally subject to more lenient investment regulation because they are deemed by authorities to be experts in their field. This limited regulation comes into play, for example, when Institutional Investors participate in private placements of securities which are not subject to the full might of securities laws. In the United States, private placements may be made to an accredited investor – a term which incorporates Institutional Investors – without registering the offering of securities with the SEC.
Institutional Investors also have the advantage of being able to effectively spread risk by holding a broad portfolio of investments, incorporating a variety of companies and spanning more than one economic sector. Spreading risk ensures that if one company fails, or one sector encounters difficulties, it does not sink the entire investment. Another advantage that Institutional Investors have is that they can play an active role in corporate governance by exercising their voting rights. Moreover, the fact that they provide capital to corporate companies gives Institutional Investors a measure of power when it comes to influencing their conduct. Furthermore, having the freedom to buy and sell shares, Institutional Investors often play a significant role in whether a company thrives or goes into decline.
Institutional Investors have made a significant contribution to the development of an integrated and efficient global financial sphere through their large-scale investments that are not limited by borders. Excess liquidities of OPEC and G8 pension funds have reportedly been channeled towards Western bourses, as well as emerging markets, the latter being markets that are considered to be experiencing rapid growth, spurred on by industrialization. There are currently up to 28 countries deemed to be emerging markets, with China and India being the largest, and including countries such as Brazil, Argentina, Mexico, Chile, Peru, Russia and other Eastern Europe countries, plus parts of Africa.
Certainly, Institutional Investors hold a lot of sway in the world of high finance and the stock market, and many individual investors keep a close eye on the activities of these investment giants and which companies they are supporting, modeling their investment decisions along the same lines.
