A developed and efficient financial system is a crucial component of a national economy. A national financial system is composed of institutions, markets and regulators governing financial market operations and a network of linkages between them. Financial institutions channel the savings of the economies surplus units and allocate it efficiently through financial markets. Over recent decades the dominant position of banks is challenged by the growing importance of non-banking institutions: pension funds, insurance companies and investment funds. Their influence on the depth and width of the financial market promotes competition and efficiency of the financial system. Additional benefits are: incentives for financial innovation, modernisation of capital markets, enhancement of transparency and information disclosure, and the strengthening of corporate governance. Institutional investors are increasingly becoming more important participants in global financial markets, including emerging market economies. The significance of institutional investors in transition countries is even greater in relation to the underdeveloped local capital markets and in the light of their considerable growth potential. Therefore, it seemed reasonable to investigate the financial markets and institutional investors in selected European transition countries, including Croatia. The research has set and confirmed the fundamental scientific hypothesis that it is possible to measure the influence of institutional investors on the capital markets in the conditions of shallow and underdeveloped financial market such as found in the researched transition countries. In addition, there are some market and government measures which may be applied in order to ensure a more developed and efficient capital markets such as: pension reforms, strengthening of the equity pension funds and the position of institutional investors, voucher privatization, issuing of governmental bonds in domestic capital markets, strengthening of supervisory structures, and promoting the capital market as a means of collecting capital. The main goal of the dissertation is to address the potential benefits from the process of interaction between institutional investors and securities markets in Croatia and in other transition countries.