Institutional Buying Stocks ~REPACK~
Over the years, the influence of institutional investors over public companies has grown dramatically, with the number of U.S. corporate shares managed by institutional investors ballooning to 67 percent in 2010 from a mere 5 percent in 1945, according to a study conducted by professors at the Wharton School of the University of Pennsylvania.
institutional buying stocks
Institutions are estimated to account for as much as 70 percent of stock trading volume. All told, institutional investors controlled $25.3 trillion, or 17.4 percent of all U.S. financial assets as of the end of 2009, according to a report by the Conference Board.
In the end, investors should research all aspects of a company before investing, not just the level of interest in the stock shown by institutional investors. Both following the smart money and deliberately avoiding it can lead investors to make decisions that may not be appropriate for them.
If a company has a lot of large investors, that institutional ownership could weigh heavily in shareholder voting, including proxy votes on the makeup of the Board of Directors and corporate action. Alternatively, if one institution starts selling large blocks of a stock that could prompt others to follow suit and could result in significant volatility, particularly if the institution selling is one that leads others to follow suit.
An institutional investor is an entity that makes investments on behalf of someone else. Examples include pension funds, mutual funds, insurance companies, university endowments, and sovereign wealth funds.
For one, institutions have the ability of buying tens of millions of dollars worth of a stock and even hundreds of millions of dollars. And because their purchases are often so large, it typically takes weeks, if not months, for an institutional investor to build a position.
Given this commitment, considering it will also take several weeks or months to get out, you can be sure that these institutional investors have done plenty of homework to feel good about the fundamental prospects of the company.
This does not mean you can ignore your own analysis or the stock market as a whole. But screening for stocks with rising volume (along with prices of course) can put some fantastic stocks on your radar screen.
One week volume spikes, however, will not get thru, as oftentimes those can be driven by one day events. Instead, it's the successive volume increase that shows true buying demand, giving this set-up its value.
What we're looking for are noticeable increases, like 10%, 20% or 50% increases, etc. But nothing outrageous, like a 10 fold increase. Remember, the last thing an institutional investor wants to do is call too much attention while he or she is in the midst of building a position. But if you know what to look for, you can see all of this happening in plain sight. And get in for the ride as they flesh out the rest of their position.
The most important elements to this screen are the price and volume items (especially the volume). The Zacks Rank also helps to make sure that their earnings estimates are on the rise. The price item, however, is a personal preference as I generally don't buy stocks under $5. But it should also be noted that many institutions won't either. But if you're looking for lower priced stocks, you can of course remove this item. And lastly, the average volume item ensures there's enough trade activity on a daily basis to get in and out of the market easily.
The study examines the relationship between institutional ownership and liquidity of stocks, focusing on the effect of institutions' information advantage on liquidity. The information advantage of institutions can affect liquidity through two channels: adverse selection and information efficiency. The adverse selection effect results from an increase in information asymmetry. The information efficiency effect, however, results from an increase in competition among institutions. Competition promotes the rate at which private information is incorporated into prices, reducing uncertainty about future payoffs. I find evidence of a nonmonotonic (U-shaped) relationship between the fraction of shares of a firm held by institutions and various measures of stock liquidity. This evidence of a nonmonotonic relationship strongly suggests that the two effects coexist and interact with each other. The effect of information advantage of institutions on liquidity also varies with the amount of publicly available information and asset risk. My evidence indicates that institutional ownership (Granger) causes liquidity, allaying, to an extent, concerns that findings are a result of institutions' preference for liquid stocks. Lastly, I document that institutional investor characteristics, such as investment horizon and risk aversion, also affect liquidity. Liquidity decreases with both increases in fraction of equity held by long-term investors and risk aversion of institutional investor.
However, during the 2020 stock market plunge that came with the COVID-19 pandemic, the opposite was true. What destabilized the market then? Professionals who pick stocks at big institutional investors, as new research shows.
Put another way, these active institutional investors fled risky stocks in favor of those with strong balance sheets and, as a consequence, caused the market to crash more than it would have otherwise done.
That conclusion was based on an analysis of the institutional ownership of stocks at the end of the fourth quarter of 2019, along with the performance of stocks during the frenzy period. They found that stocks with higher institutional ownership were hit harder than those with lower institutional ownership.
However, while the sales were frenzied, the active managers knew precisely the stocks they wanted to ditch and the ones they wanted to accumulate. It was those stocks that were financially weaker, based on the strength of their balance sheets, that were hit hardest.
Matos is an expert in the fields of asset management, investments, corporate governance and international finance. His research focuses on international corporate governance and the growing importance of institutional investors in financial markets worldwide.
Using a sample of daily institutional trading data, the authors directly test theories of portfolio pumping and window dressing by institutions. They find evidence consistent with portfolio pumping but discover that abnormally low institutional selling, rather than abnormally high institutional buying, is the cause. They also find evidence inconsistent with window dressing.
The authors use a sample of daily institutional trading data to directly test theories ofportfolio pumping (i.e., trading at period-ends to suggest better performance) and windowdressing (i.e., altering period-end holdings by buying winners and selling losers) byinstitutions. They find evidence consistent with portfolio pumping but discover thatabnormally low institutional selling, rather than abnormally high institutional buying, isthe cause. In addition, they find that at year-ends, institutions tend to buy stocks inwhich they already have large positions. They also find evidence inconsistent with windowdressing.
Because the authors perform a direct test on actual institutional trading data, theirresults are more reflective of institutional trading behavior than those of previousresearch. Prior researchers have used such indirect sources as holdings, mutual fundreturns, and stock return data.
Finally, the evidence that is inconsistent with window dressing suggests that investors canrely on observed institutional holdings data. Window dressing is a problem because itdistorts the period-end portfolio composition and could mislead investors into believing theportfolio performed better or had lower risk than it actually did.
To examine the window-dressing hypothesis, they perform two tests. First, they determinewhether managers buy stocks that performed well and do not buy stocks that performed poorlytoward the end of the quarter or year. Second, they study the trading behavior at thebeginning of the year. It is expected that when institutions buy winners to window dress atthe end of the year, there will be less buying and more selling of winners at the beginningof the following year. The authors identify winners (losers) as stocks with a past one-yearbuy-and-hold return that places them in the highest-return (lowest-return) quartile amongall stocks in the CRSP database.
' + 'Double-counting - On the 13-F filing, each institutional holder must report all securities' + 'over which they exercise sole or shared investment discretion. In cases where investment discretion is' + 'shared by more than one institution, care is generally taken to prevent double-counting, but there is always' + 'the exception. Another cause of double-counting is a company name change for the 13F filer where the' + 'holdings are accounted for under both filer names.' + '
' + 'Short Interest - A large short interest amount affects the institutional ownership amount' + 'considerably because all shares that have been sold short appear as holdings in two separate portfolios. One' + 'institution has lent its shares to a short seller, while the same shares have been purchased by another' + 'reporting institution. Consequently, the institutional ownership percentage reflected in the 13-F filings is' + 'overstated as a percentage of total shares outstanding.' + '
Articles in the financial press suggest that institutional investors are overly focused on current profitability, which suggests that as institutional ownership increases, stock prices reflect less current period information that is predictive of future period earnings. On the other hand, institutional investors are often characterized in academic research as sophisticated investors and sophisticated investors should be better able to use current-period information to predict future earnings compared with other owners. According to this characterization, as institutional ownership increases, stock prices should reflect more current-period information that is predictive of future period earnings. Consistent with this latter view, we find that the extent to which stock prices lead earnings is positively related to the percentage of institutional ownership. This result holds after controlling for various factors that affect the relation between price and earnings. It also holds when we control for endogenous portfolio choices of institutions (e.g., institutional investors may be attracted to firms in richer information environments where stock prices tend to lead earnings). Further, a regression of stock returns on order backlog, conditional on the percentage of institutional ownership, indicates that institutional owners place more weight on order backlog compared with other owners. This result is consistent with institutional owners using non-earnings information to predict future earnings. It also explains, in part, why prices lead earnings to a greater extent when there is a higher concentration of institutional owners. 041b061a72