Share Prices Or Shareholders: Who’s In The Driver’s Seat?

In the share markets, a classic chicken and egg situation has to do with the increase in share prices and the number of unique shareholders. The two ways in which this poser is approached is - does an increase in share prices attract more and more investors or do the prices of stocks inch up when investors start accumulating them? Is there really a one-to-one co-relation between these two factors in their rise and fall, or are their dynamics complicated further by other factors?

Our study shows that the rise or fall in the number of retail shareholders does feature among the various factors impacting share prices, albeit with a lower impact.

To find out more about the cause and effect relation between share prices and the number of shareholders, we studied the BSE-200 index data. We took into consideration the data for change in number of shareholders (excluding institutional and promoter shareholders) for the past five quarters – this was done to eliminate any temporary fluctuations in the number of shareholders. Then, we calculated the price change in these stocks from September 1 2012 to September 30, 2013. Following this, we conducted a regression analysis between the change in number of shareholders and the change in share price, and found a strong relation between these two factors.

Nonetheless, what really surprised us was the negative relation between the rise in number of non-promoters and non-institutional shareholders and the share price. What this means is that many a time, retail shareholders start accumulating a stock when the share prices fall. In our study, this was seen occurring 40% of the time. The best example is that of Wockhardt, which saw the number of retail shareholders shoot up by 90% when the share price dropped by almost 60%. Same was the case with Financial Technologies, YES Bank and Bata India.

Of course, the reverse is also true. As the share price starts increasing, retail shareholders are the first to exit. This was seen happening almost 25% of times in our study, and the best examples of the same are United Breweries, Idea Cellular and Crisil.

It may be argued that the fall in prices and the rise in retail shareholders is due to the increase in the total number of shares, which reduces the earning per share. In all the above examples, we have not seen any such corporate action that has increased the number of shareholders. So, what explains this?

One of the points to be considered here is that retail shareholders are latecomers to the party. What this means that when institutions and promoters start selling the stocks once they lose confidence in the stock, the price falls and it is retail shareholders who buy them. Instead of doing their homework in researching the company, retail shareholders take a decision merely by comparing the share prices. Moreover, institutions have huge holdings – when they sell, a large number of retail shareholders are needed to buy those shares.

Beside this, our study also points towards the impatient nature of retail shareholders. They are the first to sell once the share price starts increasing. Our advice to retail shareholders would be that you need to do detailed research on the stocks you are entering or exiting and need to be patient to realise the full potential of your equity investments.

Want to know more about the relation between change in institutional shareholder and change in share price? Watch this space.