Institutions have large sums of money, so it isn't surprising why companies and the market welcome them with open arms. These entities are (but aren't limited to) mutual funds, 澳洲幸运5官方开奖结果体彩网:pension funds, hedge funds, and insurance companies. Their interests are generally in💃 line with those of smaller shareholders. But institutional involvement isn't always a good thing—especially when institutions sell their sta🅰kes.

As part of the research process, individual investors should peruse sources like SEC Form 13-D, which is available at the 澳洲幸运5官方开奖结⭕果体彩网:Security and𓆏 Exchange Commission's (SEC), and other sources, to see the size of 澳洲幸运5官方开奖结果体彩网:institutional holdings in a firm, recent purchases, and sales. Read on for some of the pros and cons that go along with 澳洲幸运5官方开奖结果体彩网:institutional ownership, including driving interest in stoc🍒ks𝓰 and proxy fights.

Smart Money of Institutional Ownership

One of the primary benefits of the institutional ownership of securities is their involvement is seen as being smart money. 澳洲幸运5官方开奖结果体彩网:Portfolio managers often have analyst teams at their disposal, as well as access to a host of corporate and market data mo🐠st retail investors could only dream of. They use the𒀰se resources to perform an in-depth analysis of opportunities.

Does this guarantee they'll make money in the stock? Certainly not, but it greatly enhances the probability that they will book a profit. It also puts them into a potentially more advantageous position than that of most individual investors.

Institutions and the Sell Side

After some institutions like mutual funds and hedge funds establish a position in a stock, their next move is to tout the company's merits to the 澳洲幸运5官方开奖结果体彩网:sell side. Why? The answer is to drive interest in the stock and to boost 澳洲幸运5官方开奖结果体彩网:share price value.

That's why you see top-notch portfolio managers and 澳洲幸运5官方开奖结果体彩网:hedge fund managers touting stocks on television and radio or at investment confe༺rences. Sure, finance professionals like to educate people, but they also like to make money, which they can do by marketing their positions—much like a retailer advertises its merchandise.

Once an institutional investor establishes a large position in a company, its next motive is typically to find ways to drive up its value. In short, investors who get in at or near the beginning of the institutional investor's buying process stand to make a lot of money.

Institutions as Citizen Shareholders

Institutional turnover in most stocks is quite low. That's because it takes a great deal of time and money to research a company and build a position in it. When funds accumulate large positions, they do their utmost to ensure those investments don't go awry. To that end, they'll often maintain a dialogue with the company's 澳洲幸运5官方开奖结果体彩网:board of directors and seek to acquire stocks that other firms might want to sell before they hit the 澳洲幸运5官方开奖结果体彩网:open market.

When it comes to being considered activist hedge funds typically get the lion's share of attention. But, many mutual funds have also ramped up the pressure on boards of directors. For example, Olstein Financial generated a lot of press for peppering several companies, including Jo-Ann Stores, with ways to drive 澳洲幸运5官方开奖结果体彩网:shareholder value, like suggesting the hiring of a new 澳洲幸运5官方开奖结果体彩网:chief executive officer (CEO).

The lesson that individual investors need to learn here is that there are instances when institutions and management teams can and do work together to enhance 澳洲幸运5官方开奖结果体彩网:common shareholder value.

The Scrutiny of Institutional Ownership

Investors should understand that although mutual funds are supposed to focus their efforts on building their clients' assets over the long haul, individual portfolio managers are frequently evaluated on their performance on a 澳洲幸运5官方开奖结果体彩网:quarterly basis. This is because of the growing trend to 澳洲幸运5官方开奖结果体彩网:benchmark funds (and their returns) against those of major m𓂃arket i꧒ndexes, such as the S&P 500.

This process of evaluation is quite fraught, as a portfolio manager with a bad quarter might feel pressured to dump underperforming positions (and buy into companies that have trading momentum) in the hope of achieving parity with the major indexes in the following quarter. This can lead to increased traꦯding costs, taxable situations, and 💞the likelihood that the fund sells at least some of these stocks at an inopportune time.

Hedge funds are notorious for placing quarterly demands on their managers and traders. This i൩s dꦚue to the fact that many of these managers get to keep 20% of the profits they generate. The pressure on these managers and the resulting fickleness can lead to extreme volatility in certain stocks. In fact, it can also hurt the individual investor who happens to be on the wrong side of a given trade.

Pressures of Institutional Owner Selling

Institutional investors can own hundreds of thousands or even millions of shares. So when an institution decides to sell its holdings, the stock will often sell off, which impacts many individual shareholders. This happened when activist shareholder Carl Icahn announced that he wished to sell his position in Mylan Labs in 2005. The company's shares shed 5% of their value the next day.

Of course, it's hardly possible to assign the total 澳洲幸运5官方开奖结果体彩网:volume of a stock's decline to sales by institutional investors. The timing of 🥀sales and concurrent declines in corresponding share prices should leave investors with the understanding that large institutional selling does not help a stock go up. Due to the access and expertise enjoyed by these institutions—remember, they all have analysts working for them—the sales are often a harbinger of thin𝓀gs to come.

The big lesson here is that institutional selling can send a stock into a downdraft regardless of the underlying 澳洲幸运5官方开奖结果体彩网:fundamentals of the company.

Proxy Fights Injure Individual Investors

As mentioned above, institutional activists typically purchase large quantities of shares and then use their equity ownership as leverage, allowing them to obtain a board seat and enforce their agendas. While there can be a boon for the common shareholder, the unfortunate fact is that many 澳洲幸运5官方开奖结果体彩网:proxy fights are typically drawn-out proc💯esses that can b𝓰e bad both for the underlying stock and for the individual shareholder invested in it.

Take what happened at The Topps Company in 2006. Two hedge funds, Pembridge Capital Management and Crescendo Partners, with a position in the stock, tried to force a vote on a new slate of directors. The battle was eventually settled, but the 澳洲幸运5官方开奖结果体彩网:common stock lost value during the three months of back and forth between the parties.

While the full blame for the decline in the share price can't be placed on this one incident, these events don't help share prices move up because they create bad press and typically force executives to focus on the battle instead of the company.

Investors should be aware that although a fund may get involved in a stock intending to do something good, the road ahead can be difficult and the share price can, and often does, wane until the outcome becomes ꦍmore certain.

The Bottom Line

Individual investors should not only know which firms have an ownership position in a given stock, but they should also be able to gauge the potential for other firms to acquire shares while understanding the reasons for which a current owner might 澳洲幸运5官方开奖结果体彩网:liquidate its position. Institutional owners have the p𓄧ower to both create and destroy value for individual investors. As a result, it is important that investors🌌 keep tabs on and react to the moves the biggest players in a given stock are making.