Why are institutional investors important?


Quick Answer

Institutional investors provide a large pool of funds that can be used by companies to raise capital through stock issues. Institutional investors also allow small investors to invest in a wide range of stocks by buying institutionally provided funds that aggregate stocks, rather than investing in each stock separately.

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Full Answer

As of 2010, institutional investors controlled approximately 65 percent of all stocks on the market. When the top 1,000 companies are considered separately from the rest of the market, institutional control rises, holding about 73 percent of the outstanding stock in those companies as of 2009. This large ownership amount not only provides the capital that many companies need to expand and thrive in their areas of expertise, but they also allow the institutions holding the stocks to oversee the activities of these companies.

Institutional investors have greater resources to oversee company operations compared to the average stockholder. They can have a direct effect on the direction a company takes, due to having a large influence over stockholder votes. For companies that are largely owned by institutional investors, this provides an additional layer of protection for all stockholders of the company, making the process of obtaining additional capital investment much easier.

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