While it's true that there are millions of individual stock traders, the fact still remains that markets move largely based on the activity of larger institutional investors. The individual investor must learn about the role of institutional investors in day-to-day market movements.

Definition

When an individual trades stock, it is on behalf of themselves and normally in relatively small amounts. Institutional investors are trading on behalf of a pool of investors and in large volumes that cause price fluctuation in an individual stock or the market as a whole.

Example

Perhaps the best known example of an institutional investor is Warren Buffett. As CEO of Berkshire Hathaway, he is regarded by many as the most successful American investor in history. When Berkshire Hathaway buys stock in a company, the market moves drastically.

Types

Examples of institutional investors include banks, insurance companies, retirement or pension funds, hedge funds and mutual funds. Governments can also act as institutional investors.

Research

Knowing where institutional investors are investing their money can be found in the research area of stock-oriented websites. Make sure to look at the date of the research since institutional interest figures can sometimes be months old.

How to Profit

If the investor can predict the actions of institutional investors, they can profit from their movements. This is extremely difficult for the part-time investor and not recommended as an overall strategy. Another way to profit is to invest in sectors that have little institutional interest and wait for the sector to become attractive to institutions in the future.

Source:

Forbes.com: Warren Buffett

More Information:

Institutional Investor Magazine