Why are stocks having less institutional investors a “good thing”?
"Institutional investors are the ""elephant"" in the room. When they ""sneeze,"" everyone else ""catches cold."" They're fine, if they're buying after YOU do. They're not bad, if you want to buy after they sell en masse. But when you read about moves of 10 percent, 15 percent or more in a single day, it's because a bunch of institutional investors all decided to do the same thing on the same day.  That's more volatility than most people can stomach. Fewer institutional investors in a stock mean fewer chances of those things happening." "It's not necessarily bad but it can cause the stock price to become a lot more volatile. Depends on which side of the bet you're on ;) Suppose a hedge fund manager thinks a company is poorly run. He may buy a ton of shares so that he can get rid of the current CEO and replace it with his/her own. For the hedge fund and others long on the stock, this is good. Those who are trading options or using some short-term strategies could get screwed because of the sudden volatility.  My next point is related to the above. What is the intrinsic value of a stock? The current price of a stock is the equilibrium of all investor's perception of the stock's value. Professionals make up a value for a stock using models such as DCF. Once they do so they trade based on what they believe the value of the stock is. You might calculate a stock is worth 70 and I believe it's 80 so the stock price is going to fluctuate a bit but it should keep within that range (assuming we're the only investors). Then comes a hedge fund manager, say Carl Icahn, and discloses a stake in our stock. ""Wow, the stock must be really valuable!"" Everyone starts buying this stock so up it goes to 90, simply because the guy who seems to know what he's doing bought it. The point here is that now it's not trading based on intrinsic value, now it's purely psychological. Ie. it's now a momentum stock, which you have no idea when it'll crash. Look at Tesla, Netflix, or just google momentum stocks. All the big crashes in stock prices happen when these big funds unload their stocks. A surge in supply will cut the price. The problem is you can't predict when some fund manager will decide to sell some stake of his.  Tying everything together is liquidity. The more liquid a stock is, the easier it is to obtain and the less volatile it is. The more people playing the game, with not too big shares of stock, the faster the price will converge to some equilibrium and with less volatility. Institutional investors take away liquidity." Its pretty much always a positive to have large institutional investors. Here's a few cases where I can see an argument against large institutional investors: In recent years, we've seen corporate raiders and institutional investors that tend to influence management in ways that are focused on short term gain. They'll often go for board seats and disrupt the existing management team. It can serve as a distraction and really hurt morale. Institutional investors also have rules in their prospectus that they are required to abide by. For example, some institutional investors will not hold on to stock below $5. This really affected major banking stocks, some of which ended up doing reverse stock splits to keep their share price high. Institutional investors will also setup specific funds that require a stock to be listed as part of an index (i.e. the SPY, DJIA etc.,). When a stock is removed from an index, big investors leave quickly and the share price suffers.  In recent months, companies like Apple have made their share price more affordable to attract retail investors. It gives an opportunity for retail to feel even more connected to the company. I'm not sure how much this affects overall sales... Generally, a good stock should be able to attract both retail and institutional investors. If there's not a good mix, then its usually a sign that somethings amiss. Because someone smarter than you by 50 IQ points (a quant) will depart their larger position long before you have a chance to see it coming. Your stop losses are useless as the market will open with the issue below your sell price. Your trade even if place at the same mine would settle after theirs. don't piss in the tall grass with the big dogs. If they are wrong or right does not matter you will be haircut or whipsawed. Let’s turn this round. Now what if the only people willing to own part of company are doing it due to the expectation that they will make money in the short term form the company…. Generally speaking, having more institutional investors is a good sign. Of course there are many types of institutions.  Normally we are thinking of mutual funds, pension funds, endowments, and hedge funds.  They may not all have the same implications.  Hedge funds, in particular, are out to make a buck with very little restriction on how they do it.  They may buy an undervalued stock and then use their voting power to improve the company or they may do something more questionable, like pump up the stock price and then sell at the high, causing volatility.  The people you are referring to may be thinking of something like the latter. Those concerns are generally small when compared with the known positives of institutional ownership.
Anti-Facebook circlejerk continues. Where were these articles before it went public ? It makes it seem like bad for common investors when in reality they couldn't even get in on the stock. It was the institutional funds and connected investors who bought the stock at 38. The common market actually was the one that didn't support the stock once it went public.   If anyone, it's the institutional funds that got screwed. @Joe.E, I disagree with your logic. The IPO clearly didn't go well--not relative to other IPOs.  Were it not for the stocks underwriters stepping in late in the trading day, Facebook would likely have closed below their opening price. This story and others indicate that institution investors were given negative information by an analyst for the underwriters that other investors didn't have.  This inside knowledge is certainly contributing to the drop in the stock.  It's fair to argue that many individual investors were suckered into buying the stock at the IPO price because of this incomplete disclosure. It wouldn't surprise if what's happens has a negative impact on future trading volume, and creates reluctance to invest in the firm--which would certainly be an additional negative outcome beyond the dropping stock price. Edit: Dilip mentioned a lawsuit.  Here's a link to an article about it. "A great deal of analysis on this question relies on misunderstandings of the market or noticing trends that happened at the same time but were not caused by each other.  Without knowing your view, I'll just give the basic idea. The amount of active management is self-correcting.  The reason people have moved out of actively managed funds is that the funds have not been performing well.  Their objective is to beat their benchmarks by profiting as they correct mispricing.  They are performing poorly because there is too much money chasing too few mispricings.  That is why the actively managed industry is shrinking.  If it gets small enough, presumably those opportunities will become more abundant and mispricing correction will become more profitable.  Then money will flow back into active funds. Relevant active management may not be what a lay person is thinking of.  At the retail level, we are observing a shift to passive funds, but there is still plenty of money in other places.  For example, pension and endowment funds normally have an objective of beating a market benchmark like the Russell 3000.  As a result they are constantly trying to find opportunities to invest in active management that really can outperform.  They represent a great deal of money and are nothing like the ""buy and forget"" stereotype we sometimes imagine.  Moreover, hedge funds and propreitary trading shops explicitly and solely try to correct mispricings.  They represent a very, very large bucket of money that is not shrinking.  Active retail mutual funds and individual investors are not as relevant for pricing as we might think.  More trading volume is not necessarily a good thing, nor is it the measure of market quality.  One argument against passive funds is that passive funds don't trade much.  Yet the volume of trading in the markets has risen dramatically over time as a result of technological improvements (algorithmic traders, mostly).  They have out-competed certain market makers who used to make money on inefficiencies of the market.  Is this a good thing or a bad thing?  Well, prices are more efficient now and it appears that these computers are more responsive to price-relevant information than people used to be.  So even if trading volume does decrease, I see no reason to worry that prices will become less efficient.  That's not the direction things have gone, even as passive investing has boomed. Overall, worries about passive investing rely on an assumption that there is not enough interest in and resources for making arbitrage profits to keep prices efficient.  This is highly counterfactual and always will be.  As long as people and institutions want money and have access to the markets, there will be plenty of resources allocated to price correction." An overvalued blue chip is  likely to retain some value if things go the wrong way.. Derivatives are a different game altogether. He said the average investor, which is accurate.. a slightly more inclined amateur will go for strategies such as value/growth.. but amateurs don't usually touch complex CDS/swaps/collars/etc.   I get where you're coming from, and I agree, being an institution in itself doesn't guarantee better results.. but you're fooling yourself if you think they don't have advantages over retail investors. Makes perfect sense in two ways. Staying private allows companies to focus on long term strategy rather than quarterly results, and some of the companies mentioned raised lots of money very quickly but might not have the most stable strategy over the long term which would turn off public investors. "In general, there should be a ""liquidity premium"" which means that less-liquid stocks should be cheaper. That's because to buy such a stock, you should demand a higher rate of return to compensate for the liquidity risk (the possibility that you won't be able to sell easily). Lower initial price = higher eventual rate of return. That's what's meant when Investopedia says the security would be cheaper (on average). Is liquidity good? It depends. Here's what illiquidity is. Imagine you own a rare piece of art. Say there are 10 people in the world who collect this type of art, and would appreciate what you own. That's an illiquid asset, because when you want to sell, maybe those 10 people aren't buying - maybe they don't want your particular piece, or they all happen to be short on funds. Or maybe worse, only one of them is buying, so they have all the negotiating leverage. You'll have to lower your price if you're really in a hurry to sell. Maybe if you lower your price enough, you can get one of the 10 buyers interested, even if none were initially. An illiquid asset is bad for sellers. Illiquid means there aren't enough buyers for you to get a bidding war going at the time of your choosing. You'll potentially have to wait around for buyers to turn up, or for a stock, maybe you'd have to sell a little bit at a time as buyers want the shares. Illiquid can be bad for buyers, too, if the buyer is for some reason in a hurry; maybe nobody is selling at any given time. But, usually buyers don't have to be in a hurry. An exception may be if you short sell something illiquid (brokers often won't let you do this, btw). In that case you could be a forced buyer and this could be very bad on an illiquid security. If there are only one or two sellers out there, they now have the negotiating leverage and they can ask whatever price they want. Illiquidity is very bad when mixed with margin or short sales because of the potential for forced trades at inopportune times. There are plenty of obscure penny stocks where there might be only one or two trades per day, or fewer. The spread is going to be high on these because the bids at a given time will just be lowball offers from buyers who aren't really all that interested, unless you want to give your stock away, in which case they'll take it. And the asks are going to be from sellers who want to get a decent price, but maybe there aren't really any buyers willing to pay, so the ask is just sitting there with no takers. The bids and asks may be limit orders that have been sitting open for 3 weeks and forgotten about. Contrast with a liquid asset. For example, a popular-model used car in good condition would be a lot more liquid than a rare piece of art, though not nearly as liquid as most stocks. You can probably find several people that want to buy it living nearby, and you're not going to have to drop the price to get a buyer to show up. You might even get those buyers in a bidding war. From illiquid penny stocks, there's a continuum all the way up to the most heavily-traded stocks such as those in the S&P500. With these at a given moment there will be thousands of buyers and sellers, so the spread is going to close down to nearly zero. If you think about it, just statistically, if there are thousands of bids and thousands of asks, then the closest bid-ask pair is going to be close together. That's a narrow spread. While if there are 3 bids and 2 asks on some illiquid penny stock, they might be dollars away from each other, and the number of shares desired might not match up. You can see how liquidity is good in some situations and not in others. An illiquid asset gives you more opportunity to get a good deal because there aren't a lot of other buyers and sellers around and there's some opportunity to ""negotiate"" within the wide spread. For some assets maybe you can literally negotiate by talking to the other party, though obviously not when trading stocks on an exchange. But an illiquid asset also means you might get a bad deal, especially if you need to sell quickly and the only buyers around are making lowball offers. So the time to buy illiquid assets is when you can take your time on both buying and selling, and will have no reason for a forced trade on a particular timeline. This usually means no debt is involved, since creditors (including your margin broker) can force you to trade. It also means you don't need to spend the money anytime soon, since if you suddenly needed the money you'd have a forced trade on your hands. If you have the time, then you put a price out there that's very good for you, and you wait for someone to show up and give you that price - this is how you get a good deal. One more note, another use of the term liquid is to refer to assets with low or zero volatility, such as money market funds. An asset with a lot of volatility around its intrinsic or true value is effectively illiquid even if there's high trade volume, in that any given point in time might not be a good time to sell, because the price isn't at the right level. Anyway, the general definition of a liquid investment is one that you'd be comfortable cashing out of at a moment's notice. In this sense, most stocks are not all that liquid, despite high trading volume. In different contexts people may use ""liquid"" in this sense or to mean a low bid-ask spread." There is a survivorship bias in the mutual fund industry. It's not about individual stocks in which those funds invest. Rather, it's in which funds and fund companies/families are still around. The underperforming funds get closed or merged into other funds. Thus they are no longer reported, since they no longer exist. This makes a single company's mutual funds appear to have a better history, on average, than they actually did. Similarly, fund companies that underperform, will go out of business. This could make the mutual fund industry's overall history appear to be better than it actually was. Most companies don't do this to deliberately game the numbers. It's rational on the part of fund companies to close underperforming funds. When a fund has a below average history, investors will likely not invest in it, and will remove their existing money. The fund will shrink while the overhead remains the same, making the fund unprofitable for the company to run. As other answers have pointed out, professional real estate investors do own residential investment properties. However, small residential units typically are not owned by professional real estate investors as your experience confirms. This has a fairly natural cause. The size of the investment opportunity is insufficient to warrant the proper research/due diligence to which a large investment firm would have to commit if it wanted to properly assess the potential of a property. For a small real estate fund managing, say, $50 MM, it would take 100 properties at a $500K valuation in order to fully invest the funds. This number grows quickly as we decrease the average valuation to reflect even smaller individual units. Analogously, it is unlikely that you will find large institutional investors buying stocks with market caps of $20 MM. They simply cannot invest a large enough portion of total AUM to make the diligence make economic sense.  As such, institutional real estate money tends to find its way into large multi-family units that provide a more convenient purchase size for a fund. Why is that? With all the successful investors (including myself on a not-infrequent basis) going for individual companies directly, wouldn't it make more sense to suggest that new investors learn how to analyse companies and then make their best guess after taking into account those factors? I have a different perspective here than the other answers.  I recently started investing in a Roth IRA for retirement. I do not have interest in micromanaging individual company research (I don't find this enjoyable at all) but I know I want to save for retirement. Could I learn all the details? Probably, as an engineer/software person I suspect I could. But I really don't want to. But here's the thing: For anyone else in a similar situation to me, the net return on investing into a mutual fund type arrangement (even if it returns only 4%) is still likely considerably higher than the return on trying to invest in stocks (which likely results in $0 invested, and a return of 0%). I suspect the overwhelming majority of people in the world are more similar to me than you - in that they have minimal interest in spending hours managing their money. For us, mutual funds or ETFs are perfect for this. This is dumb on many levels.  First are they really trying to blame the Flash Crash for investors leaving the market. It's 2014 and they claim in 17 of 25 months since the 2010 crash investors have withdrawn (not really sure what this means either, since shares don't disappear- does this just mean the market is up? It's unclear). Either way the article quoted is from 2012! And for a research team creating an empirical model, this is a very scary usage of small sample size,  mistaking correlation for causation,  etc.  And the algo,  though they don't give much info,  seems to be the very essence of data mining. Pick a million signals and filter on those that are empirically the best.  If you are an individual investor or a small fund thinking of purchasing something like this,  first consider: if it really worked, why are the founders selling it when they could just use it themselves and profit from it? It's almost guaranteed not to work out of sample Note that this is just looking at public firms, whose numbers have declined while the overall number of firms has increased. It would be interesting to compare their profits to GDP, that might be a better measure to find out whether profits are more concentrated than they used to be.  Also note:  &gt; However, what could indeed be a deterrent—especially for smaller companies—is that the US Congress wields far more regulatory power over public companies than private ones, note the authors. They lost money on an absolute basis. They got slammed as a hedge fund because its returns are less than 0%, not because they underperformed relative to the market.   Hedge funds aren't mean to outperform a benchmark. They are meant to preserve (and grow) your funds. That's why long only houses are happy about their -15% when the market is down 30%, but a hedge fund should be above 0%. Gotcha.  So they essentially are just your normal dude that puts money in the stock market, just bigger money.  For example, I may buy a few stocks in Apple in the hopes that I can exit at a higher price and have higher dividends.  Those big investors are doing the same thing for the 2 benefits I said earlier, but they have more money to invest.  Or do they get other benefits that us average stock holders dont get?  Thanks for the first reply. "I think equity research on the buy side is still chugging along, but on the sell-side it's dying.    Regulation FD damaged sell-side pretty bad.  I'm not saying reg FD is bad; I think it's good that everyone plays on the same playing field.  But it definitely took its toll.  Then you have higher and higher soft-dollar disclosure standards which makes it more and more difficult to get paid.  Add to that that second market volumes have fallen for something like eight years in a row and there's a shrinking pie.    And now, the SEC is going after ""expert networks"" hardcore and it has legit research providers scared to produce anything of value for fear of falling afoul of insider trading complaints." You bring up good points, but the balance of power works both ways.   Investment Banks need ratings in order to push through with fixed income issuance. If rating agencies refuse to rate a product (and it has happened, I know we are shocked!), investors will be far less likely to participate and will demand substantially higher rates of return.