Minyan Mailbag: Supporting Stock Prices
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Prof. Succo -
Let's say four big holders own 80 % of the float in a company. The remaining 20 % is owned by the public and other smaller players. Let's also assume that the big four also have the muscle power to buy the remaining 20 % if need be. I would think that this situation is highly plausible with most stocks being with institutional investors.
My question is, is it possible for the big four to just keep the stock price wherever they want? It does seem that big players can assign any value to the company as long as it stays above their basis. Can it be termed manipulation? Is it legal?
Institutions report their holdings, so no secrets are allowed. Normally, mutual funds do have rules about how large as a percentage of their fund they want in any one stock. Also, once a holding gets larger than 5% of the float of a company the holder must file with the SEC and delineate their intentions.
In certain stocks this does occur, but in large capitalization names it obviously becomes more difficult and long term manipulation/collusion is difficult. Fannie Mae (FNM) is a good example. Despite deteriorating fundamentals and increasing uncertainty in the company's "franchise", and a complete stoppage of the company issuing any financial statements at all, a few large holders increased their holdings substantially, perhaps in an attempt to support the stock. But one large holder decided to sell instead and out-trumped the buyers. So you can see that economic interests normally prevent collusion in at least large companies.
In smaller companies it is easier to "control" the stock price, at least in the short run, but ultimately fundamentals will prevail. I am intimately involved in an option position in a smaller capitalization company where one mutual fund owns 30% of the company. This holder obviously not sell the stock into a weak stock price and must wait for strength to do it. I have noticed that the fund does increase their buying when the stock price is weak on bad news. Ultimately unless they really are right in the long term, this strategy of buying into bad news will not work.
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