Institutional trading is when a company or organization trades and invests money on behalf of other people. This beginner's guide will explore how institutional trading works, focusing on the roles these entities play in the market.
Definition of institutional trading
So what is the very definition of institutional trading? This type of trading involves the buying and selling of financial instruments by institutions through traders. Pensions, hedge funds, insurance companies and mutual funds are prime examples of institutional traders and investors.
Institutional trading involves the large-scale buying and selling of securities by institutional investors. These investors include pension funds, mutual funds, hedge funds, insurance companies, and exchange-traded funds (ETFs).
They have a significant impact on the share price and the overall price of a security. Unlike retail traders, these large entities make transactions that can move markets. When institutional investors buy or sell, they do so with strategies that influence investment trends.
Institutional investors can take advantage of the multi-trading platform to provide margin trading services to their clients quickly and affordably. In addition to Metatrader 4 and 5, they are mainly based on iress business software to help them adapt and thrive.
Types of institutional trading
In general, there are four types of institutional negotiation. We are talking about hedge funds, mutual funds, investment banks and pension fund managers.
hedge funds
Access to large amounts of capital is required to operate as a hedge fund. Therefore, its clients are also institutional investors such as pension funds, investment funds and companies.
They have complete freedom in managing their clients' assets. Hence these investors are also called free managers. Their trading strategies are complex and they typically operate in derivatives markets such as CFDs, futures, options, etc. They try to optimize their clients' portfolios in both bearish and bullish market trends.
Its main strategy is arbitrage, which involves buying and selling correlated assets at the same time. They profit by buying a cheaper version of an asset and at the same time sell a more expensive version.
Mutual or investment fund managers
These funds bring together capital contributed by various individual and collective investors. Each investor in a mutual fund owns shares, which represent a portion of the fund's holdings.
Mutual funds are managed by professional fund managers who make investment decisions on behalf of shareholders. By investing in a variety of securities, mutual funds offer diversification, which can help reduce risk compared to owning a few individual stocks or bonds.
pension fund manager
Pension fund managers are investors who manage clients' pension money to make a profit. They can invest in securities, stocks, bonds, real estate, and other types of investments. The goal is to achieve growth while managing risk, ensuring there are enough assets to pay future retirees.
Investment banks
Investment banks help with financial transactions such as IPOs, mergers and reorganizations. They also give advice and can act as intermediaries in the market. Examples include JP Morgan Chase and Morgan Stanley, which are also key players in the institutional trading sector.
Institutional trading strategies
Institutional trading strategies cover a wide range of methods for managing large portfolios. Here are the most important ones.
The long-term playbook
Institutional investors focus on long-term growth opportunities that match their objectives and risk tolerance. Large investors, such as pension funds and sovereign wealth funds, invest for long periods. They increasingly use metrics such as economic value added and R&D efficiency to evaluate long-term performance potential.
This approach is similar to Warren Buffett's strategy. It focuses on capturing significant opportunities while committing to long-term investments.
Diversification Tactics
Institutional traders use strategies that promote long-term value and diversification. With significant capital, they create portfolios spread across various assets. This diversification reduces risk and takes advantage of favorable market prices.
Techniques such as index rebalancing help keep risk levels stable over time. Institutional traders also combine different uncorrelated trading strategies to protect themselves against the risks associated with any asset or market trend.
Advanced technical analysis
When making decisions, institutional traders focus on key elements of advanced technical analysis, such as:
Evaluation of the financial health of investments.
Understand directional market trends.
Analyze chart patterns.
Find the right times to start and end operations.
Institutional cryptocurrency trading
Some institutional traders invest in the cryptocurrency market, especially cryptocurrencies such as bitcoin or ethereum. But according to the analysis, only about 10.33% of the total bitcoin supply is held in ETFs, funds, and public and private companies.
The building of trust and regulatory improvements will undoubtedly attract many institutional traders to diversify their portfolios into cryptocurrencies. Once more institutional investors do so, there will also be an increase in liquidity. Higher cryptocurrency trading volume will increase market liquidity.
Institutional Traders Versus Retail Traders
First, retail traders trade using their personal brokerage account. Institutional traders operate on behalf of institutions, corporations or banks, therefore they trade for the accounts they manage.
Access to online trading platforms has narrowed the gap regarding access to various types of trading securities. Today, every retail trader can trade in real time the same assets as institutional inventors. However, retail traders still do not have access to IPOs, swaps and futures. Additionally, institutional traders can negotiate trading fees.
Their trading strategies and tools are more sophisticated than those of retail investors. Additionally, they are subject to less strict regulations than retail traders.
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