In the stock markets, there are two categories of investors in general.
- Retail Investors
- Institutional Investors
A Retail Investor, like you and me, transacts with their own money in small quantities via online brokerage firms and Demat accounts. We have to face high commissions and brokerage fees. Usually, retail investors are the last to receive any information. As a result, they act in the end after all the drama is over in the stock markets.
In my earlier days of trading, I used to buy and sell shares thinking that a trend will continue. But, most of the time, the trend moved exactly in the opposite direction. I ended up on the losing side always. It’s a classic retail investor’s misinterpretation of the circumstances, and 95% of them lose money in the stock markets.
The Institutional Investors are the large non-bank financial organizations who buy and sell securities on behalf of their members and customers. They are, in fact, the most powerful players and deal in transactions worth thousand of Crores on a single day.
Because of their dealing in huge transactions, they play an unparalleled role in the prices of securities. They also enjoy lower commissions and transaction charges compared to a retail investor. Unlike retail investors, they are privileged to the latest information in the stock markets. They possess exclusive specialized analytical tools and resources to evaluate the markets.
Like all market participants, the institutional investors are also governed by SEBI, the market regulator. Due to their humungous sized holdings, these institutions have the largest impact on the stock markets.
If you come across a huge variations in a large cap stock like 10%, 15% or more in a single session, it is probably the buying and selling taking place at the institutional level. Do not confuse with a penny stock fallling or gaining upper circuits like 10%, 20%. Penny stocks’ prices are manipulated by operators through pump and dump schemes.
Classification of Institutional Investors
Mutual funds, Hedge funds, Pension funds, Insurance companies, Commercial Bank, Endowment funds, etc. are important institutional investors in the capital markets. We shall discuss these in detail afterwards in the future.
Another important classification in the institutional investors is Domestic Institutional Investors and Foreign Institutional Investors.
Domestic Institutional Investors (DIIs) undertake investments in securities belonging to the country in which they are registered. For example, SBI Mutual Funds, Aditya Sun Birla Life, Life Insurance Corporation of India, Employees’ Provident Fund Scheme, etc. are some of the top DIIs in India.
Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors (FPIs) are the investment organizations registered with foreign countries but invest in our country. For example, Federated International funds, Fidelity funds, Russell Investment Company, etc. are foreign institutional investors in India.
You can find the list of FIIs registered with SEBI in the CDSL website.
FIIs and DIIs is a very broad subject. We shall discuss one by one in the future. I am not going to bore you with redundant information.
Current Scenario:
Domestic Institutional Investors (DIIs) and Foreign Portfolio Investors (FPIs) invested ₹1.43 Lakh Crore (around US$ 20 billion) in 2019. Since 2002, the total FII investment in India is around ₹12,37,418.75 Crores.
Out of FIIs/FPIs and DIIs, the foreign portfolio investors play a more important role in the stock market fluctuations. FPIs are foreign investment firms from another country into our economy. Their investment means foreign investors are confident of our stock market and economic growth.
We all know that the Indian stock markets have fallen drastically in March 2020. The main reason behind this crash is the huge withdrawal of investments by FIIs. In March alone, the FIIs have withdrawn around ₹1,18,203 Crores, which is equal to 9.5% of the total foreign investment in Indian stock markets. As a result, the major Indian indices lost around 23% in March alone.
Under pandemic, war, and economic crisis situations, the FIIs tend to withdraw their money and possess liquid cash in hand. It is similar to our family financial spending; as the whole economy is down due to COVID-19, we try to save more than to spend or invest. In such situations, having cash in hand is essential; it’s referred as Liquid cash in financial terms.
Summary:
What I wanted to share is that institutional investors are the predominant players in the stock market. FPI or FIIs are even bigger game-changers, who are capable of both making and breaking the stock market.
Because of critical economic situations due to COVID-19, the FPIs are withdrawing some of their invested money from the stock markets. As the pandemic subsides and the economic activities return to normal, the FPIs will once again put money back into our markets. This is what happened after the 2008-09 financial crisis.
Irrespective of the rising and fall of stock prices, the value investing always wins in the long term.
Disclaimer
I provide the information and my views on the website only to educate new investors, stock market enthusiasts, and the common public on equity or stock market investments. Please consult your financial adviser before making any investments in the stock market. In case of any queries, you can contact me via email ID or Contact Form.
