This article discusses insider stock ownership, and I will categorize the different types of shareholders into three groups:
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Off-the-radar investors
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On-the-radar investors
- Corporate insiders
A detailed description of these three groups is provided below. Additionally, I will explain how I use this categorization during my stock analysis due diligence process in the notes section at the bottom of this page.
To find out who currently owns the stock you’re interested in, I recommend reading my article, Company Ownership Search – Discover Your Stock’s Current Institutional Ownership with These 4 Free Resources, which explains the sources I use.
1. Off-the-Radar Investors
Off-the-radar investors are private investors who can buy and sell stock without any significant restrictions. I don’t consider this ownership group to be relevant as their individual holdings in a stock are relatively small, and it’s impossible to keep track of the insider stock holdings of every individual owner.
2. On-the-Radar Investors
On-the-radar investors are required to report their insider stock holdings to relevant authorities. This group includes institutional owners, mutual funds, and investors who own at least 5% of a certain stock. These professional investors often spend more time and resources on their due diligence than typical private investors. They often base their investment decisions on the opinions of a team of stock analysts and industry experts.
Here are the different types of on-the-radar investors:
Institutional Stock Ownership
Institutional stock ownership refers to the ownership stake in a listed company that is held by large financial organizations. Examples of institutional owners include banks, insurance companies, asset management firms, hedge funds and corporate pension funds. Institutional stock ownership is usually expressed as a percentage of a company’s total shares outstanding.
Mutual Fund Stock Ownership
Mutual funds are professionally managed collective investment funds that pool money from many investors to buy stocks, bonds, short-term money market instruments, and other securities. Like institutional ownership, mutual fund stock ownership is often expressed as a percentage of a company’s total shares outstanding. There are four types of mutual funds: open-end funds, closed-end funds, unit investment trusts, and exchange-traded funds (ETFs).
| Open-end funds | Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. Most open-end funds also sell shares to the public every business day; these shares are also priced at net asset value. A professional investment manager oversees the portfolio, buying and selling securities as appropriate. The total investment in the fund will vary based on share purchases, share redemptions and fluctuation in market valuation. There is no legal limit on the number of shares that can be issued. |
| Closed-end funds | Closed-end funds generally issue shares to the public only once, when they are created through an initial public offering (IPO). Their shares are then listed for trading on a stock exchange. Investors who no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an open-end fund). Instead, they must sell their shares to another investor in the market; the price they receive may be significantly different from net asset value. It may be at a “premium” to net asset value (meaning that it is higher than net asset value) or, more commonly, at a “discount” to net asset value (meaning that it is lower than net asset value). A professional investment manager oversees the portfolio, buying and selling securities as appropriate. |
| Unit investment trusts | Unit investment trusts (UIT) issue shares to the public only once, when they are created. Investors can redeem shares directly with the fund (as with an open-end fund) or they may also be able to sell their shares in the market. Unit investment trusts do not have a professional investment manager. Their portfolio of securities is established at the creation of the UIT and does not change. UIT generally has a limited life span, established at creation. |
| Exchange-traded funds | A relatively recent innovation, the exchange-traded fund or ETF is often structured as an open-end investment company, though ETFs may also be structured as unit investment trusts, partnerships, investments trust, grantor trusts or bonds (as an exchange-traded note). ETFs combine characteristics of both closed-end funds and open-end funds. Like closed-end funds, ETFs are traded throughout the day on a stock exchange at a price determined by the market. However, as with open-end funds, investors normally receive a price that is close to net asset value. |
5% Stock Ownership
5% stock ownership refers to institutions, mutual funds and individuals who own at least 5% of the total number of outstanding shares from a public listed company.
3. Corporate Insiders
The most important stock ownership group is corporate insiders, as they have better insights into the health of the corporation, and their trades can reveal important information. Insiders include the company’s management, employees, and other persons who could potentially misuse confidential information.
Note: I prefer to see substantial stock ownership by corporate insiders in the companies in which I invest, as their interests would be aligned with mine as an off-the-radar shareholder. We would all benefit from a rising share price and suffer losses if the share price declines. With their own money on the line, I believe that the company’s management is more devoted to accomplishing success. Although I prefer to see substantial insider stock ownership, I do not rely solely on this factor in my investment decisions.
