Thursday, July 29, 2010

Institutional Investors and Stock Prices

In their quest to generate impressive returns to their clients, institutional investors shape the financial world. An average investor will tend to get heavily influenced by their investment choices.

Institutions generally tend to be banks, insurance companies, pension funds, mutual funds, investment trusts, unit trusts or hedge funds. They are very meaningful invertors because of the sheer size of assets that they manage.

Any individual wandering in the financial arena should consider getting more acquainted with those entities. If you are playing in the small capitalization and mid capitalization field, you should know that some of those investors shun companies that expose their stock prices to levels that they deem too low. In fact, some if those institutional investors establish minimum buying prices; in order to avoid the frequent price manipulation that incurs from companies have a too low stock price.

For most of those investors the minimum price will be set at 5$. This will explain why some companies experience huge gain in their stock price as soon as it hits that minimum price. A good example is DryShips over the past two years. However, some funds will go as low as 1$ per share.

Mass market movements are often the consequence of actions by those investors. If we take that market plunge of September 2008, one of the conclusions implies a chain reaction in the financial market.

Like any companiy, institutional investors have balance sheets and obligations towards their lenders and must maintain some capitalization levels in order to stay solvent. When news about a financial crisis were gaining grounds, many individual investors, who had their money managed by mutual funds, pension funds or companies, began redeeming their investment, thus causing a lot of stress on the cash position of those companies. Those institutional investors were forced to sell promising positions to fulfill their cash balances that were dwindling because of redemptions from clients or investors.

The investing world is a challenging one for value investors. Even if you get the right assumptions about the value of a company, institutional investors can dramatically affect your results because of their specific needs.

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