Institutional investors now comprise over 60% of the U.S. stock markets. This is up nearly 20% from 20 years ago. How institutional investors invest has a huge impact on the direction of the stock market. Many institutional investors are mutual funds so some of this shift comes from retail investors who did not invest before and now buy mutual funds for the knowledge that fund managers bring and for diversification. Not many actively managed mutual funds beat their indexes so individual investors are increasingly buying index funds and passively managed ETFs. Retail investors who buy stocks play an increasingly small part in the overall stock market and its direction and when they do buy they need to be extra cautious because an institutional investor that sells their entire stake in a company can cause a stock price to drop precipitously. Likewise, if a mutual fund buys a large stake in a company, the stock price may rise as demand for shares increases.
What this all means is that retail investors should perform due diligence when buying a company's stock to determine if artificial demand for shares has created a mini-bubble in a share's price which could be difficult to recover from when the share price stabilizes in line with its fundamentals. When retail investors follow institutional investors in a particular company, the retail investor will see diluted earnings or out-sized losses if the buy at the wrong time so they must be cautious when buying individual stocks.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment