Understanding shareholding distribution
Before investing in a company, retail investors need to have a thorough understanding of the company's background. On top of its business and financial conditions, it is also essential to understand its shareholding distribution.
A listed company has different types of shareholders. When you look into the shareholding structure of a company, pay attention to its majority and substantial shareholders, e.g. their identities and their respective shareholdings and changes. Take note if the shareholding is in the hands of a small number of shareholders and exhibits high shareholding concentration, and if the company is in cross shareholding relationship with other companies.
High shareholding concentration
When a small group of shareholders holds almost all the shares of a company, the shares will be thinly traded, so that the price of the shares can fluctuate substantially even with a small number of shares traded. The Securities and Futures Commission has published "High shareholding concentration announcements" since 2009 to alert investors to those companies whose shares are vested in an extremely small number of shareholders.
Majority and substantial shareholders
Shareholders who own 5% or more of the interest in a listed company, directors and chief executives of a listed company, are obliged by law to disclose their shareholdings. Investors can check their shareholdings and the changes in the "Shareholding Disclosures" section of the HKEXnews website.
Listed companies must disclose the material investment in securities in their annual reports so investors can check if a company has invested in another company and the shareholding from its annual report. In case a company holds 5% or more of interest in another company, it becomes the substantial shareholder of that company and is required to make a shareholding disclosure.
Shares deposited with the CCASS
Shares have to be deposited with the Central Clearing and Settlement System (CCASS) in order to trade on the exchange. By using the "CCASS Shareholding Search" service on the HKEXnews website, investors can obtain information on the number of shares that listed companies have deposited with the CCASS participants including brokers and banks.
What can you learn from the distribution of shareholding?
Some investors look into the changes of shareholdings of the majority and institutional investors and follow those companies that large institutional investors, such as funds and investment banks, have stakes in, to help their investment decision-making. In general, an increase shareholding is perceived as bullish, and a reduction in shareholding is seen as bearish to the share price.
Investors may try to trace the moves of market manipulators by analysing shareholding distribution. However, the shareholding structure of a company can be rather complex, and market manipulators can employ "stock parking" methods to conceal their shareholding in a company. Without a complete picture, investors may end up making a wrong decision. When making investment decisions, it is important to take note of various factors, such as the fundamentals, including business and financial conditions and prospects rather than just looking into the shareholding distribution.
7 November 2017