Institutional Investors and ‘Smart Money’

Retail investors, also referred to as individual investors, use their own money to buy and sell securities and other investment products for themselves. Institutional investors, on the other hand, are professional investors who pool together capital—sometimes referred to as Wall Street’s “smart money”—and invest on behalf of others, typically at much higher volumes than retail investors.

These professional investors include pension funds, mutual funds, hedge funds, banks, insurance companies, endowment funds and other big investors.

Institutional investors account for large and frequent trades on behalf of organizations they represent, and institutions account for a significant percent of stock trading volume. Because of their dominance, institutional buying or selling can lead to big price moves in individual stocks and in the market overall.

The rise of institutional investors has been fueled in recent decades by the growing number of Americans who have invested in professionally managed, pooled investment products, such as mutual funds.

Read on to learn more about institutional investors and how they can and cannot impact your investments.

Smart Money Isn’t Always Smarter

Institutions often spend big sums. Due to their deep resources, they can generally conduct sophisticated research and analysis of companies and markets, and they might have dedicated teams making specialized decisions.

But just because institutional investors have more resources doesn’t mean they’ll always make the right call. Even the most advanced financial modeling can sometimes miss negative trends or fail to spot the emergence of a disruptive technology.

Not every institutional investor can outperform the market, so blindly following the smart money can potentially leave you facing losses.

Understanding Institutional Holdings

Researching companies on FINRA’s Market Data site or other financial websites can help you identify the biggest shareholders. You can also learn about institutional holders by reviewing Securities and Exchange Commission (SEC) filings. 

Institutions that manage over $100 million worth of securities are required to file Form 13F within 45 days of the end of each quarter, which gives a snapshot of a firm’s holdings as of a specific date. This can help individual investors track institutional holdings over time. Keep in mind, though, that the lag time means what you see in the filings might be outdated by the time you’re able to access the information.

Institutions that acquire beneficial ownership of more than 5 percent of a covered class of a company’s stock are required to file a Schedule 13D with the SEC within five business days after crossing that threshold. If there’s any material change in ownership, a prompt amendment is required.

Depending upon the facts and circumstances, the institution might instead be eligible to file the shorter Schedule 13G. This form can be filed as soon as five business days after passing the 5 percent threshold or as late as 45 days after the end of the calendar quarter in which that threshold was crossed, depending on the type of investor.

Individual investors can use the SEC’s EDGAR database to see the names of institutional investors in a particular company, the scope of their investments and their recent purchases and sales.

Choosing Your Investments

Some individual investors prefer to invest in companies with a high concentration of institutional ownership, considering this an important standard, among others, in choosing stocks. Others aim to “get in on the ground floor” with their investments, finding stocks with limited institutional investment to avoid the impact of a herd mentality.

Be aware that institutional investors with large stakes in a company could weigh heavily in shareholder voting, including proxy votes on the makeup of the board of directors and corporate actions. Alternatively, if one institution starts selling large blocks of a stock, this could prompt other investors to sell as well, which might lead to significant volatility.

Institutional investors are sophisticated investment professionals, and learning about their ownership can be a good way to research a company. But institutional ownership—or a lack thereof—is no guarantee that a stock or company will perform well.

If you’re a retail investor, research all aspects of a company before investing, not just the level of interest in the stock shown by institutional investors. Following the smart money or deliberately avoiding it might lead you to make decisions that aren’t in your best interest.

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