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This website is purely ACADEMIC in nature and NOT a stock market recommendation service or a tip provider. No live data or feeds are provided and all information is historic only. Information is provided for ease of understanding for the purpose of learning. Accuracy of definitions etc is not mantained. I am not a SEBI or IRDA registered.
If you observe the Share Holdidng Pattern of any company, you will observe a certain category of investors called Institutional Investors.
These are a special type of investors and when they have invested in a company, it matters a lot to us.
Today we will frame a rule that involves them:
Rule 17: Prefer to invest in those companies where there are institutional investors.
Who are Institutional Investors?
And why shouldd we influence our investing based on theirs?
Institutional Investors are guys with big bags of money to invest in.
Let us see the definition of Institutional Investors.
Institutional investors are non-bank persons or organizations involved in the collection of significant amounts of money for trading in securities, real estate and other investment assets. Operating companies who invest some of their profits in these types of assets also come under this definition.
These category of Institutional investors include the following:
- Financial institutions
- Pension funds
- Corporate Bodies
- Clearing Members
- Endowments and Foundations
- Foreign bodies
- Foreign investors
- Overseas corporate bodies
- Hedge funds
- Mutual funds
- Insurance companies
- Investment companies
- Soverign Wealth funds etc.
If a company has some institutional investors invested in it, the company would be having better prospects in future because..
.. even if we did not do research on the company, they might have done it.
Their principal objective is to buy and sell stocks.
They strive hard to buy undervalued stocks and offer good prospects.
For this, they employ specialists such as analysts and researchers to get the best information about companies.
The institutions have regular meetings with company CEOs, assess industry conditions and study in depth the prospects for every company they intend investing in.
Besides, institutional investors with large stakes have a vested interest in increasing the value of their shareholdings.
While, there are several types of institutional investors, we are more interested in two type of institutional investors: FIIs and DIIs.
Foreign Institutional Investors
When we check the Share Holding Pattern of a company, our first look will be on promoter holding.
The next check will be if the promoter has pledged his holding.
After this, our focus goes on Institutional Investors
Amongst all such Institutional Investors, we give special importance to FIIs and DIIs.
- Rule #17: Prefer stocks in which FIIs invested*
FIIs = Foreign Institutional Investors.
These are foreign investment individuals or companies that invest in our markets.
They invest large money and for long durations.
Since they hold substantial amount of shares after careful screening themselves, they are important for us.
FIIs often invest in the Indian stock markets directly or through an investment fund.
Countries with developing economies are the ones that have the highest volume of foreign institutional investments.
The growth potential in these economies is higher than the growth potential provided by the mature economies.
As India is a developing economy, it attracts a lot of these investors. To invest in India they have to register with Securities and Exchange Board of India.
There are now nearly 2000 registered foreign investors in India vis-à-vis 600 in 2005.
Foreign Portfolio Investor
Another class of institutional investors worth mentioning at this juncture are Foreign portfolio investor or FPIs.
Foreign institutional investor does not exist as a sole category anymore.
It has now been replaced by a new investor class called, “Foreign Portfolio Investor” (FPI).
This new class includes three existing classes viz. FIIs, Sub Accounts and Qualified Foreign Investors (QFI).
In accordance to this, SEBI Regulations, 2014 were modified on January 07, 2014.
These were followed by certain other enabling notification by the Ministry of Finance and RBI. The FPI regime was to commence with effect from June 1, 2014.
This was done to ensure the smooth transition of from the FII regime to the FPI regime.
The date was decided to have all systems and procedure in place before the migration to the new FPI regime.
According to this new regime, it has been decided that there is no need for a mandatory direct registration with SEBI.
This is because of a risk based approach has been adopted by SEBI to ease the entry of foreign investors in the Indian securities market.
FPIs have been made equivalent to FIIs from the tax perspective, vide central government notification dated 22nd January 2014.
Qualified Foreign Investor (QFI)
Qualifies Foreign investor is a sub-category included in the Foreign Portfolio Investor.
It refers to any foreign groups, associations or individuals, or resident.
Although, they must be from a country that is a member of the Financial Action Task Force (FATF) or a country that is a member of a group which is a member of FATF or from a country that is a signatory to the International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding (MMOU).
This scheme was introduced by the Government of India in consultation with RBI and SEBI in 2011, this was done through a Union Budget announcement.
The primary objective of taking the risk and enabling the QFIs is to deepen and to infuse foreign funds in the Indian Capital Market.
This is also to reduce the market volatility as most individuals are considered to be long term investors as compared to the institutional investors.
QFIs are allowed to make investments in the following instruments by opening a demat account in any of the SEBI approved Qualified Depository Participant (QDP):
- Equity and Debt schemes of Indian mutual funds,
- Equity shares listed on recognized stock exchanges,
- Equity shares offered through public offers
- Corporate bonds listed/to be listed on recognized stock exchanges
- G-Securities, T-Bills and Commercial Papers
Question: How can we know FII holding in a stock?
We can know this from the Share Holding Pattern (SHP) of the company.
This information will be available on
1. The company website
2. Stock exchange website.
Let us see FII holding in SBI.
On the BSE stock page, scroll to the middle of the page and click on the *SHP* link
click on "More" link to see detailed info.
Look for the latest SHP (June 2016)
Click on Details of Disclosure by Trading Members (TM) holding 1% or more of the Total No. of Shares.
You will notice certain something like: Foreign Portfolio Investors
In SBI, there are 611 Foreign Portfolio Investors holding 9.01% of the company.
So SBI is a good share in terms of FII holding.
Now let us check for a share called AMD Industries.
You will notice that there are no FIIs invested in the stock.
So AMD Industries is a share we need to avoid.
Domestic Institutional Investors
- Rule #18: Prefer stocks in which DIIs invested*
DII = Domestic Institutional Investors.
These people include Mutual Funds, Alternate Investment Funds, Financial Institutions/ Banks, Insurance Companies (LIC) etc.
For instance, check this Shareholding pattern of SBI
You will notice that:
Several DIIs have invested in SBI
Just because FIIs are there dosent mean that we can blindly buy.
It says that the company might be fundamentally a good one.
The time we are buying and the time they bought could be different.
Mutual Funds generally buy shares and hold them for months and years together.
LIC is a huge long term investor. They might have been holding SBI shares since SBI got listed on stock exchanges.
So do not go for blind buy. Only stock fundamentals are guaranteed. Stock price might not.
Institutional investors generally do not invest in tainted companies - such as those with bad promoters, risky businesses, companies that manipulate their accounts etc.
Keep an eye on Stock Manipulation section on MoneyLife where such companies are frequently listed (along with reason)
- Qualitative factors of company in stock investing
- Quantitative factors of company in stock investing
- Avoid Penny Stocks (Rule 3)
- Portfolio Management Services (PMS)
- News and its impact on Stock prices