Institutional Investors: Types

High-profile (and highly paid) individuals like major-league athletes, movie stars, or famous authors rarely (if ever) negotiate on their own. They use agents to represent them as a go-between, or intermediary. Institutional investors are honestly also intermediaries, but rather than standing between an individual and a company like celebrity agents do, they stand between an individual or entity and something else. What's on the other side of these institutional intermediaries?

No. Institutional investors like pensions, insurance funds, foundations, and endowments aren't going to other individuals.

Exactly! Pension funds, endowments, foundations, insurance companies, and banks are all intermediaries between individuals or entities and financial markets, which means that each institutional investor has a specific purpose outside investing. Just like an agent represents a client, institutional investors must represent their customers or beneficiaries. Now, think for a second about other types of investment intermediaries. Unlike an individual investor buying an equity position, like Apple or Tesla, financial intermediaries can still be a go-between for the investor and markets. What would be an example of an investment intermediary?

Not quite. The proceeds received from donations, contributions, and premiums don't flow right into other institutions.

No. Floor traders simply execute an order. They don't make investing decisions.

Bingo! Mutual funds are a form of investment intermediaries because they invest on behalf of an investor into markets. So closed-end funds, unit trusts, hedge funds, commodity pools, and exchange-traded funds are also forms of investment intermediaries. And just like institutional investors have specific purposes, these investment intermediaries have specific objectives, constraints, and costs in a legal document (prospectus), although ones that don't allow for the universal characterizations like risk objectives, return objectives, liquidity requirements, tax concerns, or legal and regulatory issues to be applied because each one has a defined purpose.

Not quite. Although the contract is based on another value, it's not an investing decision.

Speaking of defined purposes, nonfinancial corporations can also be considered intermediaries for investments in __money markets__, or the markets for fixed-income securities with one year or less to maturity. Overall, the cash-management function of nonfinancial businesses plays a vital role in financial markets and acts as an intermediary for supply and demand. So companies with enormous cash positions are active intermediaries in managing forex exposure, anticipated liquidity requirements, and tax concerns.

To summarize: [[summary]]

Other individuals

Financial markets

Other institutions

Floor trader

Mutual fund

Derivative contract

Continue

Continue