Institutional Capture Rate

Definition

The term institutional capture rate refers to a calculation that allows the investor-analyst to understand if institutional investors are acquiring the stock of the target company. Generally, institutional investors hold onto stocks longer and this attribute reduces price volatility.

Calculation

Institutional Capture Rate = Institutional Shares Bought and Sold / Total Trading Volume

Where:

  • Institutional shares bought and sold are the total of all shares bought and sold by institutional investors in a given timeframe.
  • The total trading volume accounts for all the shares of common stock purchased and sold in the same timeframe.

Explanation

Market performance measures allow the investor-analyst to understand the company's ability to achieve their high level business profitability objectives. This is usually assessed by examining metrics such as insider transactions, capture ratios, enterprise value, capitalization rates and price to earnings ratios. Market performance metrics provide analysts with a way to determine if a company is going to successfully execute their business plan. One of the ways to understand the way institutional investors feel about a company is by calculating its institutional capture rate.

Generally, institutional investors purchase shares of common stock they intend to hold for relatively long periods of time. This is because the purchase may be part of a pension fund or another large, relatively stable pool of investments. Actively buying and selling shares also drives up administrative fees, which managers prefer to keep low. Investor-analysts are interested in this metric because purchases by institutional investors tend to lower the price volatility of a security. Typically, this metric would be tracked over time to understand the direction of a stock's volatility. That is to say, whether volatility will be increasing or decreasing.

The institutional capture rate is easily calculated using publically available information. For a given timeframe, the analyst should divide the absolute value of the shares bought and sold by institutional investors by the total trading volume (shares of stock). While it may seem counterintuitive to include shares sold by institutional investors in the numerator, analysts believe that increasing interest by institutional investors, whether it's a purchase or a sale, is a positive sign for price volatility.

Example

A mutual fund manager is considering purchasing common shares of Company ABC; however, the price of Company ABC's stock was relatively volatile in the past. To understand if this trend might change in the future, he asked is analytical team to evaluate the company's institutional capture rate over time. The team evaluated a three year timeframe, with their findings appearing in the table below:

  Year 1 Year 2 Year 3
Institutional Volume 5,000,000 8,220,000 12,870,000
Total Trading Volume 125,000,000 137,000,000 143,000,000
Institutional Capture Rate 4.0% 6.0% 9.0%

Given the above trend, the mutual fund manager believed Company ABC's price volatility would be lower in the future and historical trends of volatility should not be used when assessing a purchase of Company ABC's common stock.

Related Terms

enterprise value to earnings ratio, market value added, insider stock buy-sell ratio, dividend yield ratio