Functionaries of stock exchange pdf: brokers, sub brokers and institutional investors, kinds of functionaries at stock exchanges
Question: “The institutional investors have emerged on the most important group of investors in corporate securities.” Do you agree. Discuss?
Answer: INSTITUTIONAL INVESTORS : Institutional investors are legal entities that participate in trading in the financial markets .
These constitute a segment of investors who are capable of buying or selling on a large scale in the stock exchange market. They buy and sell through brokers, sub-brokers, portfolio consultants etc.
In India, major institutional investors include life insurance corporation of India, General Insurance Corporation, Unit Trust of India, Building Societies, Charitable Trusts and Religious Organizations.
“The institutional investors have emerged as the most important group of investors in corporate securities” I agree with this statement.
Institutional investors exert a significant influence on the market in a both positive and negative way.
Often known as market makers, institutional investors exert a large influence on the price dynamics of different financial instruments.
The presence of large financial groups in the market creates a positive effect on overall economic conditions. The institutional investors activism as the shareholders is thought to improve corporate governance because of the monitoring of financial markets benefits all shareholders.
FEATURES OF INSTITUTIONAL INVESTORS:
- It is always a legal entity and it is important to understand that an institutional investor is an enterprise managing a fund, but not a mutual fund itself.
- The basis of institutional investor’s activity is professional, and it manages assets based on the interests and goals of its clients.
- An institutional investor always manages a significant number of funds
TYPES OF INSTITUTIONAL INVESTORS:
There are several types of institutional investors:
Some of them are explained as follows:
- MUTUAL FUNDS: It is the most popular institutional investor. Mutual funds are vehicles facilitating investment in a variety of securities with capital commitment from several investors, both individual and otherwise.
In other words, numerous entities invest their capital, which is pooled and in turn, invested in a bag of securities called mutual funds. Thus, individuals with understanding of stock market dynamics can rely on this instrument to mobilise their disposable income. MF is designed to minimize the risk of capital loss, wherein the gain from one dilute loss in another security kind.
- HEDGE FUNDS: Hedge funds are investment partnership where money is collected from members is pooled to invest in securities. Fund manager of hedge funds is called General partner and group of investors is called limited partners. These funds are designed to reduce risk and enhance returns via a diverse portfolio.
- INSURANCE COMPANIES: Insurance companies are heavy weight institutional investors. These institutions employ the premium they receive from policyholders into securities. Since the aggregate of premiums is considerable, their investments are also sizable. The returns insurance companies receive from trading are deployed to pay for claims.
- ENDOWMENT FUNDS: Endowment funds are set up by foundations, where the administrative entity utilizes the funds for its cause. Typically, schools, universities, hospitals, charitable organizations etc. establish these funds. Here, the investment usually acts as a deductible for the investor. These funds are so designed that the principal remains intact, and the controlling organization uses the investment income to finance its activities.
- PENSION FUNDS: Here, both employer and an employee can invest in pension funds. The accumulated capital goes toward the purchase of different kinds of securities.
There are two kinds of pension funds:
- Where pensioner receives a fixed sum irrespective of how the fund fares.
- Where pensioner receives returns based on the performance of the fund.
The role of institutional investors can be described as follows:
- LARGE PURCHASES: Institutions control large sums of money. Therefore, stocks that attract the attention of institutional investors tend to appreciate quickly and significantly. In fact, some companies will only buy the stock of a particular company if they can accumulate sufficient shares to influence its strategic direction. For any shareholder, accumulating the majority of common shares in a company provides control over the election of a board of directors and therefore the management of the business. Such interest in a stock will give it a large boost.
- INITIATES TRENDS: Institutional investors have a long-term outlook. While many individual investors lack a clearly defined target holding period, institutions purchase shares with the intent to hold them for several years. Because their purchases are preceded by a thorough analysis, sometimes lasting years, they cannot jump from one stock to another every month. In most cases, the individuals who entrust their funds to institutions will also not wed immediate withdrawals, allowing the institutions to buy and hold. Therefore, when institutions buy a stock, they initiate long-term trends. Individuals lift the share prices today and drag the same stock down shortly thereafter by selling it. Institutional buys, however, tend to ‘stick’ and establish solid and lasting trends.
- LEADERSHIP: Institutional investors are the leaders in the stock market. When even a single large institution begins to accumulate a specific stock, other institutions as well as individual investors tends to take note and follow. Such interest means that the stock’s issuer passed the stringent test of the institution’s financial analysts and holds long-term promise.