Institutional investors have a profound impact on stock prices because they account for most of the trading, their buying can send a stock price up and their selling can send a stock price down. Institutional talk can also affect stock prices, although its impact is likely to be short-term.
Institutional buying is what propels stock prices in the long run. Once a stock becomes popular with institutions, they start building positions in it. The higher a stock goes, the more institutions feel compelled to have it in their portfolios.
Conversely, if a stock disappoints -- reports results below expectations or discloses some really bad news -- institutional selling can cause a big price drop. While institutions can space their buying over a period of weeks or even months, contributing to a steady gradual rise in the stock price, they often all want out at once and create a selling stampede. A stock can take months to advance 20 or 30 percent on institutional buying and lose that much in just a day or two on institutional selling.
Stock Price Support
Since their buying can push up a stock’s price, institutions try not to overpay for stocks they buy by spacing their purchases over days or weeks, scooping up all the stock available at prices they like. They often buy “on dips,” when a stock experiences a small decline. Their buying puts a floor under a stock’s price, limiting its downside. When an institution has a large position in a stock, it can also support the price by buying more shares to keep the stock from declining.
Institutions report results quarterly. At the end of a quarter their holdings are included in a report that goes out to the investors. To look good, institutions buy stocks that have gone up and sell those that have gone down, a process called “window dressing.” Window dressing can cause short-term volatility in the last days of a quarter, creating buying and selling opportunities for astute investors.
Talking Stocks Up or Down
Institutional talk often has a short-term impact on stock prices. A favorable mention by a money manager in a TV interview or an analyst’s upgrade can send a stock price up, while an analyst’s downgrade can send a stock price down. You have to be careful when acting on institutional talk, because it is likely to be for their benefit, not yours. An institution can be talking up a stock in which it has a large position to push up the price and generate additional demand so it can sell; a downgrade may be designed to send a stock price down so that the institution can buy cheaper.
- How to Make Money in Stocks; William O’Neil