Measure content performance. Develop and improve products. List of Partners vendors. If you're an investor, it pays to know what the company's owners and most important shareholders are doing.
By watching the trading activity of corporate insiders and large institutional investors , it's easier to get a sense of a stock's prospects. While insider or institutional ownership on its own is not necessarily a buy or sell signal, it certainly offers a handy first screen in the search for a good investment.
Below is a quick review on how you can access insider and institutional ownership information to make well-informed investment decisions.
Insiders are a company's officers, directors, relatives, or anyone else with access to key company information before it's made available to the public. By paying close attention to what insiders do with company shares, savvy investors can make the reasonable assumption they know a lot more about their company's prospects than the rest of us. Since insider ownership and trading can impact share prices, the Securities and Exchange Commission SEC requires companies to file reports on these matters, giving investors the opportunity to have some insight into insider activity.
A trade can be legal or illegal depending on when an insider makes it—it becomes illegal if information behind the trade is not public. This form is also known as the Definitive Proxy Statement. This is the proxy statement in which investors can find a list of directors and officers, along with the number of shares they each own. Schedule 13D and Schedule 13G are also relevant forms to disclose outside beneficial ownership information. The following is a brief description of each form.
Forms are filed at different stages of stock acquisition. Individuals file Form 3 when they first acquire shares. Form 3 helps the SEC track initial ownership along with whether there is any suspicious activity going on. Form 4 is also referred to Statement of Changes in Beneficial Ownership. Part of the reporting includes the shareholder's relationship to the company. Insider trading must be filed electronically through the EDGAR system within two days of the transaction, giving outside investors reasonably up-to-date ownership information.
High insider ownership typically signals confidence in a company's prospects and ownership in its shares. This, in turn, gives the company's management an incentive to make the company profitable and maximize shareholder value.
But you can have too much insider ownership. When insiders gain corporate control, management may not feel responsible to shareholders and instead, to themselves. This frequently occurs at companies with multiple classes of stock, which means one class carries more voting power than another. For example, Google's much publicized initial public offering IPO in the fall of was criticized for issuing a special class of super voting shares to certain company executives. Critics of the dual-class share structure contend that, should managers yield less than satisfactory results, they are less likely to be replaced because they possess 10 times the voting power of normal shareholders.
While insider buying is usually a good sign, don't be alarmed by insider selling, unless there is a lot of it. Insiders tend to buy because they have positive expectations, but they may sell for reasons independent of their expectations for the company. It's important to know which insiders to watch. Look for clusters of activity by several insiders. If a company has more than one instance of similar insider trading over a short period, there's a sign of a consensus of insider opinion.
Large transactions also mean more than small trades. Insiders with proven track records with their Form 4 activity should be watched more closely than those with little or poor past records. Periodically, institutions make moves that have nothing to do with the underlying fundamentals of a company or its stock.
For instance, if a given company does particularly well and significantly outperforms the market, a fund could end up owning too much of its stock relative to other holdings. In those instances, the fund could sell large quantities of its shares, potentially leading to a significant price decline. To the institution, it's all in a day's business and has nothing to do with the stock itself.
However, the individual investor who gets caught in this decline could be hurt by the loss of value. Steve Lander has been a writer since , with experience in the fields of financial services, real estate and technology. Buy Stock Shares. By Steve Lander. False Increases When institutions acquire stock, they sometimes do it by gradually buying up shares.
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List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Investing Investing Essentials. Table of Contents Expand. Smart Money Ownership. Institutions and the Sell Side. Institutions as Shareholders. Scrutiny of Institutional Owners. Pressures of Institutional Selling.
Proxy Fights Can Hurt Individuals. The Bottom Line. Key Takeaways Organizations that control a lot of money—mutual funds, pension funds, or insurance companies—which buying securities are referred to as institutional investors. These financial institutions own shares on behalf of their clients and are generally believed to be a major force behind supply and demand in the market.
Whether large degrees of institutional ownership in a stock is positive or negative remains a matter of debate. Here, we take a closer look at the implications of institutional investing. Article Sources. Investopedia requires writers to use primary sources to support their work.
These include white papers, government data, original reporting, and interviews with industry experts.
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