An institutional investor is basically an organization that trades stocks and securities in a large enough quantity that they get special treatment that you and I won’t get as investors. These perks include things like lower commissions, fewer regulations, and access to many exotic financial products you won’t be able to buy from your online brokerage account.
They get this preferential treatment not only because of the amount of money they invest but because are perceived to be more knowledgeable. Examples of institutional investors are things like insurance companies, pension funds, hedge funds, banks and pension funds.
Those institutional guys often employ research analysts, portfolio managers, traders, and software developers, who have access to a number of tools the regular guy can only dream of. Sure, they usually have a couple of subscriptions to the Wall Street Journal, but what really make them stand out is professional information services such as a Bloomberg or a Thomson terminals, that can cost upwards of $20 000 per user per year.
Given their resources, expertise, and capital, institutional investors are much better equipped than the little guy when trading for the short term, given that they get relevant information about the markets before you and me, and can execute trades faster than you and me. Furthermore, these institutions being responsible for billions of dollars worth of trades, they can be a driving force for various pricing changes in the stock market.
On a longer investment horizon, however, institutional investors many advantages over you and me are much less potent, as real-time information, trading speed, and supercomputers are not very useful when trying to pick companies or sectors that will evolve into big winners 20 years from now.
Discount brokers are the intermediaries through whom you can buy and sell stocks, bonds, options, parts of mutual funds or other securities (and basically anything else that is traded on the stock market and/or has to do with investing).