How to Use Insider and Institutional Stock Ownership

You can use the trading activity of corporate insiders and large institutional investors to learn more about a stock. Insider or institutional activity should not be considered a buy or sell signal, but it gives you another tool to add to your stock evaluation toolbox.

Here is how to access insider and institutional ownership information and evaluate what it might mean for a stock you’re considering.

Key Takeaways

• A company’s officers, directors, relatives, or anyone else with access to key company information are considered insiders.
• A company’s proxy statement, Form DEF 14A, is the statement that lists directors and officers and the number of shares they each own.
• Schedules 13D and 13G are filed by companies to disclose beneficial ownership information, which is defined as more than 5% of a company’s stock issue.
• Forms 3, 4, and 5 are filed by stockholders to disclose insider beneficial ownership when they have more than 10% of voting power.

Insider Ownership

Insiders are a company’s officers, directors, relatives, or anyone with access to key company information before it’s made available to the public. If you pay attention to what insiders do with company shares, you might catch them making decisions because they have a better picture of the company’s future than those outside of it. You’ll be able to make reasonable assumptions about the company when comparing published information with share sales or purchases.

Since insider ownership and trading can impact share prices, the Securities and Exchange Commission (SEC) requires companies to file reports on these matters, allowing you to take advantage of any changes.

Important

An insider trade can be legal or illegal depending on when it is made—it becomes illegal if information behind the trade is not public.

Where to Find Insider Trading Information

You can retrieve forms from the SEC’s EDGAR database or the SEC Insider Transaction Data Sets. The most relevant forms that help you see what insiders are doing are Forms 3, 4, 5, Form DEF 14A, Form 13D, and 13G.

Form DEF 14A

This form is also known as the Definitive Proxy Statement. An SEC requirement for publicly traded companies, Form DEF 14A, must be filed ahead of shareholders’ meetings or whenever a shareholder vote is required. This statement includes a list of items being put to a vote as well as a list of directors and officers, along with the number of shares they each own.

This form also lists beneficial owners—people or entities owning more than 5% of a company’s stock—along with other pertinent information like board member nominations, as well as executive compensation.

Schedules 13D and 13G

Schedule 13D and Schedule 13G are also relevant forms that disclose beneficial ownership information. Here is a brief description of each form:

• Schedule 13D: This form is also known as the Beneficial Ownership Report. Anyone who owns more than 5% of a company’s stock must file Form 13D with the SEC within 10 days of a stock acquisition. The form must also include the reason behind the stock acquisition—whether it’s a merger, company acquisition, or takeover. Other information on this form includes the owner’s identity and the source of the funds for the transaction. Owners who acquire more than 20% of a company’s share must automatically file a Form 13D.
• Schedule 13G: Just like Schedule 13D, this form lets the public know about anyone who owns more than 5% of a company’s total stock. However, it’s shorter than the 13D because it requires much less information.

Forms 3, 4, and 5

Forms 3, 4, and 5 are filed to disclose insider beneficial ownership when shareholders have more than 10% of voting power. Forms are filed at different stages of stock acquisition.

Individuals file Form 3 when they first acquire shares. This form is also known as the Initial Statement of Beneficial Ownership of Securities. Form 3 helps the SEC track initial ownership along with whether there is any suspicious activity going on.

Form 4 is also referred to as the Statement of Changes in Beneficial Ownership. This form is used to report any changes of ownership of insiders who hold more than 10% of a company’s stock. Part of the reporting includes the shareholder’s relationship to the company.

Also known as the Annual Statement of Changes in Beneficial Ownership, Form 5 is an annual snapshot of holdings. Insider trading must be filed electronically through the EDGAR system within two days of the transaction, giving outside investors reasonably up-to-date ownership information.

Interpreting Insider Reports

High insider ownership typically signals confidence in a company’s prospects and ownership in its shares. This, in turn, gives the company’s management an incentive to make the company profitable and maximize shareholder value.

However, a company can have too much insider ownership. When insiders gain corporate control, management may not feel responsible to shareholders and, instead, to themselves. This frequently occurs in companies that issue multiple classes of stock, which means one class carries more voting power than another.

For example, Google’s much-publicized initial public offering (IPO) in the fall of 2004 was criticized for issuing a special class of super-voting shares to certain company executives. Critics of the dual-class share structure contend that, should managers yield less than satisfactory results, they are less likely to be replaced because they possess 10 times the voting power of normal shareholders.

While insider buying is usually a good sign, don’t be alarmed by insider selling, unless there is a lot of it. Insiders tend to buy because they have positive expectations, but they may sell for reasons independent of their expectations for the company.

Which Insiders to Watch

It’s important to know which insiders to watch. Clusters of activity by several insiders might indicate something is up. If a company has more than one instance of similar insider trading over a short period, there’s a sign of a consensus of insider opinion. Large transactions also mean more than small trades.

Insiders with track records of Form 4 activity should be watched more closely than those with little or poor records—there is something going on within the company. The most telling trading activity comes from top executives with the best insights into the company, so look for transactions by CEOs and CFOs.

Finally, be careful about placing too much stake in insider trading since the documents reporting them can be hard to interpret. Additionally, the activity might not mean much. Many Form 4 trades do not represent buying and selling that relate to future stock performance. The exercise of stock options, for instance, shows up as both a buy and a sell on Form 4 documents, so it is a dubious signal to follow.

Automatic trading is another activity that is hard to interpret. To protect themselves from lawsuits, insiders set up guidelines for buying and selling, leaving the execution to someone else. SEC Form 4 documents disclose these hands-off insider transactions, but they don’t always state that the sales were scheduled far ahead of time.

Institutional Ownership

Organizations that control a lot of money—mutual funds, pension funds, or insurance companies—and which buy securities are referred to as institutional investors. These entities own shares on behalf of their clients and are generally believed to be the force behind supply and demand in the market.

The Debate Over the Implications

Whether institutional ownership in a stock is a good thing remains a matter of debate. Peter Lynch, in his best-seller One Up on Wall Street, lists the 13 characteristics of the perfect stock. One of them is this: “Institutions don’t own it and the analysts don’t follow it.” Lynch favors stocks that the big investment groups overlook because they have more of a chance of being undervalued. Lynch argues that companies whose stock is owned by institutional investors are fairly valued, if not overvalued.

William O’Neil, founder of Investor’s Business Daily, on the other hand, argues that it takes a significant amount of demand to move a share price up, and the largest source of demand for stocks is institutional investors. O’Neil reckons that if a stock has no institutional owners, it’s because they have already seen it and rejected it. In his book How to Make Money in Stocks, O’Neil has institutional sponsorship as the sixth characteristic to look for in stocks worth buying.

O’Neil and Lynch both agree that institutional ownership can be dangerous. These big institutions move in and out of positions in very large blocks, so they cannot buy or sell holdings gracefully. If something is perceived as going wrong with a company and all its big owners sell en masse, the stock’s value will plunge.

Although there are mutual funds that operate with longer-term horizons, and pension funds tend to be long-term stockholders, institutional investors tend to react to short-term events. The high correlation between high institutional ownership and stock price volatility is a fact of life in investing, and so it pays to know what the institutions are up to and whether a stock you are interested in already has a large institutional interest.

Where to Find Holdings Information

Institutional investment managers who exercise investment discretion of more than $100 million in securities must report their holdings on Form 13F with the SEC. This form is filed quarterly by institutional investment managers who have a minimum of $100 million in assets under management (AUM) within 45 days of the end of a quarter. Again, you can search for and retrieve Form 13F filings using the SEC’s EDGAR database. Yahoo Finance also provides a very useful site that details stock ownership. To view this, search Yahoo Finance for a particular company and click the section labeled “Holders” to receive details on the company’s institutional holders.

Is Institutional Ownership Good for a Stock?

Institutional ownership is believed to be essential for stock values. Institutions own most of the stocks on the market, provide liquidity, and influence retail investing. They also make it easier for retail investors to access the markets. However, institutions do pose a danger to investors if they transact in large blocks, which can unduly influence prices.

Is Insider Ownership Good for a Stock?

Generally, insider ownership is good because it indicates that those working in the company believe in its prospects.

How to Check Institutional Ownership of a Stock?

The easiest way is to visit Yahoo Finance, select the company you want to research, and click “Holders” on the left. The resulting page will tell you what percentage of shares are held by institutions and insiders and give you a list of the top institutional holders.

The Bottom Line

Institutions tend to be smart, diligent, and sophisticated investors, and insiders have the best understanding of a company’s prospects, so their ownership is a good criterion for a first screen in your research or a reliable confirmation of your analysis of a stock. However, as with all fundamental analysis considerations, insider and institutional trading should be used in conjunction with several other factors.