Watch Stocks with High Levels of Institutional Ownership
Our premise is that individual investors can do just as well as institutional investors, such as pension funds and mutual funds. But that doesn't mean individuals should ignore what the pros are doing. Indeed individual investors can learn quite a lot, according to professors at Purdue University and Georgia State University.
In a recent study, they argue that stocks with high levels of institutional ownership tend to lead the market. That is, when largely institution-owned stocks increase in value, stocks with relatively little institutional ownership will increase in value down the road. Conversely, if stocks owned by big institutions fall, so will stocks not owned by them.
Looking at stock prices between 1980 and 1988, the professors found that "returns on stocks with high levels of institutional ownership lead, by as much as two months, the returns on stocks with lower levels of institutional ownership."
Previous research found that stock prices of large companies, which are often bought by institutional investors because they are liquid and therefore easy to buy and sell, served as indicators for the direction of smaller company stock prices. But the professors found that the level of institutional ownership was a key factor in whether it led the market regardless if it was big or small.
Why does this happen?
The professors argue that big institutions get and process information more quickly than do individual investors. Big institutions are also circumscribed in what they can invest in. These factors limit their choices to only a certain group of all of the stocks listed on the exchanges.
Bottom line: there are several ways to check on the level of a company's institutional ownership. The Securities & Exchange Commission has such data (http://www.sec.gov/edgarhp.htm) and companies themselves list the biggest owners in their prospectuses. You can then use the data to your benefit. If you own paper company XYZ, for example, which has low institutional ownership, and its five competitors are largely owned by institutions, you can bet that your company's stock price will lag the direction of the other five and adjust your ownership accordingly.
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