Knowing what to look for when buying stocks can make the difference between a devastating loss and a life-changing windfall. There are a handful of key components in finding growth stocks, including robust earnings and sales. But another critical element to watch for is increasing institutional sponsorship.
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Institutions include big money managers such as mutual funds, pension funds, hedge funds, insurance companies and universities.
Large institutions have the funds and resources to do the deep analysis and find winning growth stocks.
They are also the main buying and selling force in the market.Investment managers buy large lots with conviction when building or increasing a position. And it may take months or years to get to the desired level. Moreover, institutional buying and selling accounts for up to 70% of activity in most of the leading growth stocks, according to IBD research.
Investors can spot if a stock is an institutional darling or being dumped, if they know where to look.
It Matters Which Funds Are Buying Stocks
Increasing demand — as shown by higher volume while a stock's price is rising — pushes up its value even more. In addition, a benefit of strong institutional ownership is liquidity. This allows you to easily sell shares when you decide to get out, even in a weak market.
The IBD Accumulation/Distribution Rating is a quick way to see if institutions are buying or selling a stock. This is found on MarketSmith's weekly chart or in IBD's Stock Checkup tool. Stocks are rated from A+ to E, with A+ being the best and E being the worst. An A+ rating indicates heavy institutional net buying over the last 13 weeks, while an E indicates a barrage of selling over that same period. Look for A+ or B ratings, although C ratings are acceptable.
Investors can check the percentage of mutual fund ownership of a stock on MarketSmith. In researching stocks to buy, you should look for a significant increase in fund ownership in its most recent quarter and over the last several quarters. These quarterly numbers are listed on the weekly charts in MarketSmith.
Next, consider the quality of those funds that own the stock. Look for top-performing funds with a recent track record of better-than-average performance.
How To Find Owners Of Growth Stocks
To get an even more detailed picture of fund ownership, click on the "Related Information" slide-out tab on MarketSmith charts. Open the "Owners & Funds" tab, the click on "Show Fund Ownership." That will show all funds that own the stock, including the IBD fund rating.
Also listed is the percentage that the stock makes up of each of the funds. Now you have one more tool in your toolbox to find winning stocks.
The Owners & Funds tab also shows the number of shares owned by the funds in each of the last eight quarters. If it's decreasing, it could mean large money managers are unloading the stock.
The IBD Stock Checkup includes the percentage change in the number of funds owning the stock since the previous quarter, and the number of consecutive quarters with rising fund ownership totals.
Follow Kimberley Koenig for more stock market news on X/Twitter@IBD_KKoenig.
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FAQs
Why It's Important. "Institutional sponsorship" simply refers to ownership of a stock by mutual funds, banks, pension funds and other large institutions. These professional investors have teams of analysts researching thousands of stocks, so it's good confirmation to see them buying a stock you're considering.
Why are institutional investors important in the market? ›
Institutional investors provide capital to businesses through the purchase of shares in the company. This capital can be used to fund operations, research and development, and other activities that support the growth and success of the business.
Is institutional ownership good for a stock? ›
Stocks with a large amount of institutional ownership are often looked upon favorably. Large entities frequently employ a team of analysts to perform detailed and expensive financial research before the group purchases a large block of a company's stock.
Why is it important for investors to pay attention to institutional holdings? ›
The high correlation between high institutional ownership and stock price volatility is a fact of life in investing, and so it pays to know what the institutions are up to and whether a stock you are interested in already has a large institutional interest.
What are the benefits of institutional shares? ›
Institutional share classes usually have the lowest expense ratio of all share classes offered by a mutual fund. They also don't typically require sales charges. Low fees make institutional share classes the most attractive class of fees for mutual fund investors.
How do institutional investors affect the stock market? ›
Because they pool money, institutional investors have much more money to invest than all but the wealthiest individual investors. They use that money to buy large blocks of securities, and their massive size means that institutional investors' trades can have a powerful impact on the market.
How do institutional investors affect stock prices? ›
The trades of institutional investors affect the market prices of stocks due to the sheer number of shares they buy and sell at once. The trades of institutional investors affect the market prices of stocks due to the sheer number of shares they buy and sell at once.
What does institutional ownership tell you about a stock? ›
Institutional ownership reveals how much stock is owned by fund companies, pension funds or other big organizations. By themselves, these statistics cannot tell you whether a company is healthy or weak, or if the stock is a gem or a dog.
What percentage of the stock market is owned by institutional investors? ›
What percentage of investors are institutional? Institutional investors account for about 80% of the volume of trades on the New York Stock Exchange.
What is institutional sponsorship? ›
"Institutional sponsorship" simply refers to ownership of a stock by mutual funds, banks, pension funds and other large institutions. These professional investors have teams of analysts researching thousands of stocks, so it's good confirmation to see them buying a stock you're considering.
The IBD Accumulation/Distribution Rating is a quick way to see if institutions are buying or selling a stock. This is found on MarketSmith's weekly chart or in IBD's Stock Checkup tool. Stocks are rated from A+ to E, with A+ being the best and E being the worst.
What are the key characteristics of institutional investors? ›
Common Characteristics
- Scale: Refers to the relatively large amount of investable assets at an institution as compared to a retail or high-net-worth investor. ...
- Long-term investment horizon: Some institutions, such as foundations, sovereign wealth funds, have unlimited time horizons.
Typically, institutional investors look for investments that are stable, predictable, and contain a reasonably compensated level of risk. They will use large teams to make decisions, identify opportunities, and carefully construct their portfolios.
How much of the S&P 500 is owned by institutions? ›
Institutions own about 78% of the market value of the U.S. broad-market Russell 3000 index, and 80% of the large-cap S&P 500 index. In dollars, that is about $21.7 trillion and $18 trillion, respectively.
What power do institutional investors have? ›
Voting Power: Institutional investors participate in shareholder voting on matters such as electing directors, executive compensation, mergers, and other critical decisions. Their votes can shape the outcome of these issues and hold management accountable.
What are institutional investors important in today's business world? ›
Impact of Institutional Investors
Often called market makers, institutional investors exert a large influence on the price dynamics of different financial instruments. The presence of large financial groups in the market creates a positive effect on overall economic conditions.
How do institutional investors manipulate the market? ›
Market manipulation may involve techniques including: Spreading false or misleading information about a company; Engaging in a series of transactions to make a security appear more actively traded; and. Rigging quotes, prices, or trades to make it look like there is more or less demand for a security than is the case.
Do institutional investors perform better in emerging markets? ›
Emerging markets with their imperfections, low liquidity, and dominance of naive retail investors are likely to provide attractive profit-making opportunities for sophisticated and resourceful institutional investors.
What is the role of investors in the market? ›
Investors are those who purchase shares of a company for the long term with the belief that the company has strong future prospects. Investors typically concern themselves with two things: Value: Investors must consider whether a company's shares represent a good value.
