5 things to know about shareholding patters before investing in a company

Podcast Duration: 05:32

Hello friends and welcome to another informative podcast by Angel Broking.

Shareholding patterns are an important facet of trading because they give traders incredible insight into the financial health and outlook of a given company. In today’s podcast we are going to discuss what shareholding patterns are and how traders use them.

Shareholding pattern refers to the division of shares that haven't been put on the stock market between various individuals and institutions. Let me give you an example. Let us say you bought 5 family packs of ice-cream to beat the heat. At lunch earlier today, you and your family opened up one pack and ate almost all of it. You put the remainder into a bowl. The ice-cream that has been eaten can be equated to stock that has already been put on the stock market. However there is a whole lot of ice-cream … some in the freezer, some in the chill tray and of course, the leftovers in the bowl. These three categories of ice-cream can be equated to the stock held by other stakeholders.

Companies are expected to publish a shareholding pattern report every three months. A shareholding pattern report will display the following:
• Promoter shareholding
• Institutional shareholding
• Non Institutional shareholding
• Public that is to say individuals holding more than 1% shares
• Public that is to say individuals holding more than 5% shares
• List of locked-in shares
• List of encumbered shares

But why is this necessary you ask and how exactly does it indicate the company’s financial health or help me predict stock price, you ask…
Well, it gives you an idea of three very important things.
Number 1 – Who is controlling the company.
Number 2 – The popularity of the company’s stock in various investor segments.
Number 3 – The moves being made by big ticket investors whose trades can end up becoming market trends.

Now we’re ready to dive into the five things you absolutely must understand about shareholding patterns before investing in a company. These are the things you need to look for in a shareholding pattern report.

Number 1. Most importantly – look at promoter and institutional shareholder patterns. Compare their present holdings to their holdings the previous quarter. If their holdings are reducing, it means that their confidence is reducing and this is a red flag. If these parties start selling off their stock, there will be panic among shareholders. The stock price will drop, only worsening things and adding to the panic – this often results in people dumping stock and driving the stock price into the ground. Conversely, if these parties are increasing their holdings as compared to the previous quarter it indicates confidence and this could drive demand that in turn drives up the stock price.

Second – you need to not get carried away with point number one. Too high a shareholding pattern by promoters could prove detrimental because they could start taking the potential risk too personally (or will just start making personally beneficial decisions), which might ultimately result in losses. It is important to recognize that we are all human and that the need to act on self-preservation is inherent in everyone. Tempted with too much control and too much risk, it is likely that even people with the best interests will put their own profiteering first.

The third thing to keep in mind about shareholding patterns before buying stock is that a stable or increasing institutional shareholder pattern is a good sign. After these are the most knowledgeable and their stamp of approval is definitely cause for confidence.

The fourth thing to keep in mind about shareholding patterns before buying stock is that a decreasing promoter shareholding pattern need not immediately be a cause for alarm so much as it is a call to dig deeper. They promoters might just be doing so to increase capital and enable growth. Don’t jump to conclusions and go into panic mode. Look at the whole picture.

Number five – an increasing shareholding pattern from mutual fund and insurance houses is a good sign. Don’t forget that mutual fund houses and insurance companies hire the best minds in the business and the fact that they think it is a good idea to park their investors’ capital somewhere can usually be a green signal for other investors too. They are sort of the influencers of this segment. For example, when a new actress appears on the Bollywood landscape and is cast in a big ticket film by a big ticket director, she tends to get a whole lot of offers from other directors. There is absolutely no guarantee that she is a good actress or that any of the films will do well, but the big ticket director’s confidence drives all the other directors’ confidence.

That about rounds up the five things you need to look at with a magnifying glass in shareholding pattern reports before you jump in and buy any stock. But as a trusted reference point I cannot possibly conclude today’s podcast without cautioning you about the fact that these are not the only things to watch out for before buying stock. You also need to look at Quarterly Earnings reports, minute charts and technical indicators. This is not a buffet – you cannot pick and choose what you will look at before buying stock. You must look at it from all angles to mitigate losses or to minimize your chances of incurring losses.