Institutional investment
Presently the institutional investors are the dominant users of United States financial markets in terms of trading on exchanges, ownership of equity ownership and total assets invested in equities. United States insurance companies also manage over $1 trillion in securities investments. Historically, stocks were only a small part of insurance company assets, for reasons rooted both in the industrys investment philosophy and in laws regulating the industry. State laws now commonly allow some investment in stocks, often requiring them to be maintained in a separate account.
In the last few decades, mutual funds became popular. A mutual fund, often setup by a financial management services company to invest in securities, might have growth, income or other objectives. It might focus on securities that are either all or mostly domestic, foreign or international. Customers, including many small investors, buy shares of the funds and share in the funds profits or losses. Historical ownership patterns suggest that institutional investing has broadened the base of participation in markets.
Institutional ownership of New York Stock Exchange listed stocks has increased from 13 percent to nearly 50 percent. Institutional funds do about 55 percent of all New York Stock Exchange trades: another 26 percent are done by exchange member firms for their own accounts and only 18 percent are done for individuals. According to the securities industry association, less than 50 percent of institutional trades are in blocks smaller than 900 shares. Institutions own about 39 percent of the stocks listed on National Association of Securities Dealers Automated Quotation. They also dominate the market for privately placed corporate securities.
INDIVIDUAL INVESTORS.
Individual investors now own just over 50 percent of American equity and account for less than one-fifth of all trading. Over half of the population owns some type of equity investment, although, for most, it is through participation in institutional investments, such as mutual, pension and insurance funds. Direct ownership is concentrated among a relatively small proportion of investors. The United States, nevertheless, has the highest level of individual participation in the securities markets of any country in the world. Less than 25 percent of British citizens hold stock investments.
It is commonly said that individual investors are leaving the market, because they have been net sellers for 5 years and their holdings are decreasing. The number of Americans owning stock actually increased at least until 1985, growing from 42 million to47 million in the preceding 5 years. However, nearly all of the increase was in ownership of shares of mutual funds. The number of Americans directly owning stock has almost certainly decreased, although the numbers are hard to pin down.Income and investment patterns suggest that individual investors can be grouped into three sets. The frost includes people who have less than $5,100 directly invested in the stock market. This is about 45 percent of all individual investors.
BROKERS .
Major changes have occurred in the operations and structure of the brokerage industry during the past few decades; contributing factors were the paper work crisis, the unfixing of commission rates, the departure of many retail investors from direct investments in common stock, the increasing dominance of institutional investors and more attractive returns for brokerage firms from risk-based businesses. This has resulted in floundering of uncertainty for many brokerage firms; other changes include cyclical impacts on the industrys employment and profit levels and increased concentration in the industry. The long term effects on small investors have not all been beneficial.The back office overload of the late 1960s accelerated the introduction of computers into brokerage firms. Since then, computers have increasingly permeated most of their operations, from recordkeeping to order entry, transaction confirmation, client report preparation, client account analysis and clearing and settlement. .
Competition for commission rates led to substantial rate reductions for institutional customers and kept rates on small orders from rising. Based on a survey conducted by the Institutional Investor in 1989, 99 percent of responding pension plan sponsors monitored their commission costs, 50 percent monitored soft-dollar usage, 45 percent monitored market price impact and almost half reported that they have cost cutting programs or are planning to start them.In spite of the growth of stock trading volume, commission revenues in the brokerage industry have declined as a proportion of total revenue. Institutional and retail trading volume both have fallen below record peaks in 1987. The combined effect of this trend is that commissions from equities transactions have declined from over 60 percent of all revenues in 1965 to under 17 percent in the first half of 1989.
A TIERED CliENT STRUCTURE .
Some brokerage firms have begun to treat all but their largest institutional clients like retail customers. One firm found that 150 of its clients were contributing 90 percent of its revenue, while the remaining approximately 700 institutions contributed about 10 percent. Only the 150 largest institutional clients now get lower commissions, access to the firms research and direct access to its analysts. Medium sized institutions and large retail clients, however, still receive better service than do small retail clients. If this trend becomes industry wide, it will create a three-tiered brokerage system, with institutional investors, medium institutional and large retail customers and small retail customers each paying different rates and receiving different services by full service brokers.
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