This week's question is from Ron in Minnesota:
Q: Here is a question for you. Can a company have too much institutional ownership? If institutional ownership is already near 100% – then how can enough big boys get in to drive the price up? It seems like the big boys can only get out and thus move the price down? Thanks in advance for setting me straight.
A: The answer to this question is another question: What makes price go up? Let's say you own a condo that you bought for $300,000. What makes the price go up? Or down? Since there is only one seller, you, why would the price go up? Because the buyer really wants the condo. So you own 100% of the condo and the buyer still drives up the price.
Same thing with institutional money: If other institutions want into this stock, they are going to have to buy from other big guys who already own it. If the ones who own it don't want to sell, the price is going to be bid up higher and higher until some of them do want to sell. And the reverse happens also.
Therefore, 100% institutional ownership is not a major problem for us.
UNLESS there is not enough liquidity to make trading in and out of this stock easy. Make sure that this thing is trading at least 100 times the amount you are thinking of buying. If you want to buy $10,000 worth, see if it is averaging $1,000,000 of trading a day.
Now go play.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.