Understanding Stock Ownership

One of the more important facts you should understand when researching stocks is the reporting of stock ownership figures.  Stock ownership provides us not only with a glimpse into the major shareholders of a company, but also the recent changes in shares held by those same institutions or individuals.

Statements of Stock Ownership Information

Stock ownership information is typically reported in a somewhat standard format that includes the total number of shares outstanding, institutional ownership (%), the top 10 institutions (%), mutual fund ownership (%), 5% / insider ownership, and finally float (%).  Each of these types of ownership concepts are discussed below:

Institutional Stock Ownership

Institutional ownership is usually stated in terms of the percentage of the outstanding shares of stock issued by a company that are owned by institutions.  Institutions consist primarily of asset management firms such as TIAA CREFF Investment Management, Barclays Global Investors, and Fidelity Management & Research.

Institutional ownership information is further broken down into several subcategories:

• Top 10 Institutions (%) - the percentage of outstanding shares of stock that are held by the top 10 institutions.
• Mutual Fund Ownership (%) - the percentage of outstanding shares held by institutions that are invested in mutual funds.

5% / Insider Ownership

5% or Insider Ownership tells us how many outstanding shares of stock are held by insiders or individuals and institutions that own 5% or more of the total number of outstanding shares.  A five percent stake in any large company is significant, and most companies don't have such large shareholders.

That being said there are 5% ownership positions held by individuals and institutions.  For example Bill Gates owns about 10% of the outstanding shares of Microsoft.  And the investment firm of Berkshire Hathaway owns about 8% of Coca Cola's outstanding shares.

Stock Float

The term "float" is used in many different ways, but when used to describe stock ownership, float refers to the percentage of outstanding shares that are not owned by insiders of the corporation.  The exact calculation of float is:

Float % = (Shares Outstanding - Share Owned by Insiders) / Shares Outstanding

Detailed Stock Ownership Information

In addition to the overall percentages held by institutions, insiders and individuals described above, stock ownership data also includes the exact positions and names of those mutual funds, institutions, and individuals.

Stock Ownership Example

For example, on December 31, 2005, Bill Gates held 997,499,328 shares of Microsoft with a market value of $26 billion, which represented 9.8% of the total shares outstanding.

In addition to the shares held by each of these large shareholders, we also get to see the change in position over the last 3 months or so.  For example, here is some actual information on Institutional Ownership in Microsoft (5/23/2006):

The above table tells us that Barclays recently sold around 9 million shares of Microsoft, which was 2.0% of their total holdings.  Barclays also owns 4.0% of Microsoft's outstanding stock and that makes up 1.7% of the entire portfolio of stocks owned by Barclays.

Stock Ownership Activity

To make things easier, ownership activity is usually summarized for the investor.  Here again, the best way to explain the concept of ownership activity is using an actual table of information:

Microsoft Ownership Activity (5/23/2006)

So what do the ownership terms appearing in the above table tell us?

• Total Positions - this is the total number of institutions, and the number of shares held by institutions.
• New Positions - this is the number of new institutions taking ownership of this stock, and how many shares they own.
• Sold Out Positions - this is how many institutions have sold all of their shares on this stock, and how many shares were sold.
• Buyers - this value tells us how many of these institutional owners are buying shares of the company's stock, and how many shares they purchased.
• Sellers - this value tells us how many of these institutional owners are selling shares of the company's stock, and how many shares they sold.
• Net Position Change - finally, the net position change is simply the institutional buyers minus the institutional sellers.

Interpreting Stock Ownership Information

Now that we've discussed the stock ownership information that you're likely to encounter, what does all this stock ownership information mean?

First we need to understand that institutions buy and sell stock for a variety of reasons.  Institutional investors may want to capitalize on what they perceive to be a short-term inefficiency in the stock market.  For example, when the price of a stock on the NYSE and its corresponding futures contract on the Chicago Mercantile Exchange are out of sync, one can buy the less expensive security and sell the more expensive.  This is also known as stock arbitrage.

But this type of activity means that all institutional trading of stocks cannot be completely explained by the financial health or the fundamental analysis that an individual may have performed while researching a stock.  As just explained, stock can be traded based on a short-term market inefficiency.

As investors, we use stock ownership information to augment our research, as well as to understand the effect these institutions can have on the price of a share of stock.  If there is one thing we need to understand about institutional ownership it's this:  Large institutions can own enough shares of stock to single-handedly drive the price of that stock either up or down.

By analyzing stock ownership information, we gain a better understanding of the opportunities for the movement in a stock's price to occur.  For example, a stock with a relatively large proportion of their shares held by institutional owners may be a more volatile stock.  This attribute would also be reflected in the stock's beta.  Some investors view these relatively rapid swings in stock price as a risk they'd prefer to avoid.

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