Many investors choose to research the percentage of a company's stock held by institutional investors as a way to gauge where larger investors are investing their money. These institutions may include mutual funds, pension funds, big banks,and other large financial institutions.They represent the largest source of supply and demand in the market, and are the first ones who participate in the primary market. Institutional investors are also responsible for the majority of trades on the secondary market. Because of this, they have a great influence on stock prices.
If you see investors hold more than 100% of a company's shares, you should assume there is a problem with the data.
Sometimes, you may come across a case where an investor appears to hold shares in a company that far exceeds what actually exists. Obviously, it's technically impossible for any shareholder or category of shareholder—institutional or individual—to hold more than 100% of a company's outstanding shares. So when you see investment information websites reporting institutional holdings that exceed 100%, you can probably assume there is something wrong with the data. There are two likely sources responsible for these reporting errors.
Key Takeaways
- Institutional investors have a great influence on the market, and the way they trade can affect the way stock prices move.
- There are instances where investors appear to hold shares in a company that far exceeds what actually exists.
- If you see investors holding more than 100% in a company, it may be due to a delay in updates.
- Another reason for exceeding the 100% holding mark may stem from short selling between investors.
Slow Updates
The first, and usually most obvious, reason to explain why an institutional investor holds more than 100% of a company's shares stems from delays in updating publicly available data. The figures released in an institution's report correspond to an institutional holding's date.These dates generally differ somewhat among all of the institutions that hold a company's stock, resulting in differences that could impact the reported percentage for total institutional holdings being displayed.
The numbers presented are updated on a monthly basis with alag of approximatelyfour weeks. As a result, even a slight delay in the reporting dates among one or more institutions could throw off the count, making it appear as though one shareholder or investor holds more than 100% of acompany's outstanding shares.
Short Selling
Along with the delays in reporting ownership between institutional investors, another situation may arise that can cause a sudden bump in institutional ownership of stock: Short selling. Remember, short selling is when one investor borrows shares in a company and immediately sells them to another investor. In many cases, some investors plan to buy the shares back for less money.
Here's an example of one of the most likely causes of distorted institutional holdings percentages. Let's assume Company XYZ has 20 million shares outstanding and Institution A owns all 20 million. In a shorting transaction, institution B borrows five million of theseshares from Institution A, then sells them to Institution C. If both A and Cclaim ownership of the shares shorted by B, the institutional ownership of Company XYZ could be reported as 25 million shares (20 + 5)—or 125% (25 ÷ 20). In this case, institutional holdings may be incorrectly reported as more than 100%.
In cases where reported institutional ownership exceeds 100%, actual institutional ownership would need to already be very high. While somewhat imprecise, arriving at this conclusion helps investors todetermine the degree of the potential impact that institutional purchases and sales could have on a company's stock overall.
The Bottom Line
Institutional ownership and sponsorship of a particular company's stock, often driven by factors other than fundamentals, are not always good gauges of stock quality. Investors taking afundamentalapproach should take the time to understand the connection between a company's fundamentals and the interest the company attracts from large institutional investors.
