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Understanding Institutional Investment In Stocks

Aug 17, 2007
Large companies and institutions employ teams of analysts to help invest in other companies. If they buy a particular stock, the market often expects the stock to have significant upside potential. And if they are selling the same stock, it could mean that the company, whose shares are being sold, is witnessing some difficulties.

The investment trends of the Institutional Investors can be traced online. The following information is online.

1. Institutional ownership of shares in a particular company and its percentage.

2. Number of shares in the company

3. Transactions over the last three months.

4. Details of buyers and sellers.

It can be misleading to blindly follow the trends of Institutional Investors, since theit priorities and the priorities of individual investors often differ. These large firms must meet performance goals, which compel them to trade more frequently than individual investors. Analysts and equity researchers dig deep into the history of the companies and usually recommend buying undervalued shares for long-term prospects. With the possession of more shares, these firms play a major role in the decision-making processes of companies, which leads to better management and higher stock valuation.

Even with a team of analysts working on investment patterns, this is a risky business. The concentration of investments in a particular domain spells danger as any fluctuation in the stock market or the subsequent impact on a particular domain may spell large losses. Institutional Investors are accountable to the individual investors, who have pooled their money into the institution. At times the pressure of this obligation triggers them to invest in a particular sector with significant risks. The lure of getting huge returns within a small time frame causes some of them to invest heavily in high-risk sectors. There is also the risk of investing in companies, which are at the peak of their lifecycle. These companies can either show a slow increase in the value of their stocks or a downslide. Investors generally commit these mistakes when the focus of the investors is only on the price fluctuation of the stocks.

The activities of institutional investors can be traced by closely monitoring trading, since they usually deal in block trades, in the line of $100,000 or above. Possessing investments from some of these firms is considered a safe bet, but the valuation of those stocks may be high. This is the reason why they are always on a lookout for a growing company, which has significant future growth prospects overlooked by other major investors. When institutional investors reduce their position in a stock, the value of that particular stock may fall significantly.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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