If you're interested in the stock market, it can be beneficial to find out which stock institutions and investors are buying. After all, these buyers are often quite knowledgeable and are great at predicting which types of stock will do well in the future. However, finding stock with high institutional buying can be easier said than done. If you want to invest in the same stock as the big institutions, keep your eyes out for a few major clues.
Certain Types of Volume Increase
Perhaps the most obvious sign of stock with high institutional buying is a spike in volume. While there's no guarantee that the volume is due to institutions, it's a pretty safe assumption. Institutions often have tens of millions of dollars to invest in stock, while individuals often have a lot less capital to invest. However, not all volume increase is equal.
For example, volume increases that continue over two or three weeks are typically better than those that happen over just one week. After all, a single event can trigger a volume increase in one week. However, if it continues after the initial excitement, it's a sign that institutions are paying attention. The percentage of the increase matters as well. For example, if the volume goes up by 10 to even 50 percent, it's a great sign. However, a tenfold increase may be too good to be true. Remember that savvy institutions that you want to follow would not be that obvious with their investment.
Check the Ratios
Another tool for those looking for institutional buying is the accumulation/distribution rating. The scale for this rating goes from A to E, with A meaning heavy buying and E meaning lots of selling. Stock with more institutional buying will have an A or B rating. You can also use the up/down volume ratio to determine how many institutions are buying a stock. This ratio calculates the buying and selling ratio over the most recent 50 sessions. 1.0 or greater means that the stock had a net positive over that time. The higher the ratio, the more buying there has been.
The ownership of a company can signal what's going on with its stock. While this is not as concrete as ratings and ratios, it can be a great first screening tool for investors. When you see a fair amount of insider buying, you can assume that the owners feel confident in the company and its future. However, the reverse is not always true. There may be reasons for insider selling that have nothing to do with confidence in the company.
- On some screeners, you must select the number of shares institutions bought in Step 4 instead of the percentage growth in ownership. Choose the highest available number of shares purchased, such as “greater than 500,000.”
- Avoid relying only on institutional ownership information when buying stocks. Always review a company’s other information before picking up shares.
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