Stock Fundamentals: Institutional Involvement & Insider Trading
The Influence of Institutional Investors
When it comes to purchasing shares of public companies, it's not just individual investors like you and me who can participate. Large institutional investors, such as mutual fund companies and pension funds, also actively invest in stocks. These institutional investors usually take a long-term approach, conducting thorough analysis and due diligence before making investment decisions. Their involvement is often seen as a positive sign since they have substantial funds and demonstrate confidence in the company.
However, it's important to note that institutional involvement can have its downsides as well. When these investors decide to sell their shares, it can lead to a significant decline in stock prices due to the sudden increase in supply. Institutional investors typically hold a large number of shares, and when they offload them, it affects the demand-and-supply dynamics in the market.
Reasons Behind Stock Price Movements
There are various reasons why investors start selling their stocks, which can lead to changes in stock prices. One fundamental reason is a decline in a company's performance. When investors perceive a deterioration in key metrics such as year-on-year growth, profit margins, price-to-earnings (P/E) ratio, or earnings per share (EPS), it signals potential financial challenges for the company. As a result, investors may start selling their shares, leading to an oversupply of stocks and a subsequent drop in stock prices.
For a more detailed understanding of the factors influencing stock price movements, we recommend checking out the third chapter of our course, Basics of Stocks, titled "Stock Price & Returns."
What is Insider Trading?
Insider trading is an important concept to understand if you are invested in the stock market. It refers to the buying or selling of publicly-traded company securities based on non-public, material information. Material information is information that can significantly impact an investor's decision to buy or sell a security. Insider trading can be classified into two types: illegal and legal.
Illegal insider trading occurs when insiders, such as company executives, possess confidential information and use it to trade shares. For example, if a CEO learns that the company is about to lose a government contract, they may sell their shares before the information becomes public. Similarly, if a relative of the CEO gains knowledge of the contract loss, they may also sell shares. Even a government official who becomes aware of the contract loss may engage in insider trading by selling shares. These examples illustrate illegal insider trading activities.
On the other hand, legal insider trading allows insiders to legally buy and sell their company's stock. However, they must follow certain rules and regulations, and they are required to disclose their transactions to the Securities and Exchange Board of India (SEBI).
It's important to note that insider information is now easily accessible to everyone. The internet has made investing more accessible, and anyone can access insider trading statistics through various online platforms.
Conclusion
In this chapter, we explored the concept of institutional involvement in the stock market and gained insights into the factors that can influence stock prices. We also delved into the intriguing world of insider trading, distinguishing between illegal and legal activities.
By understanding these aspects of stock investing, you are equipped with valuable knowledge to make informed decisions in the stock market. Stay tuned for the next chapter, where we will continue to unravel the intricacies of stock fundamentals and provide you with more tools for successful investing.
Remember, investing involves risks, and it's essential to conduct thorough research and consult with financial experts before making any investment decisions.