Investors are always looking for the next big thing in stocks. This raises a problem.
Unless you want to pay an equally big price for a star stock, you have to do something different from the rest of the investors.
Finding promising stocks before they take off is the goal and you want to build up a position as cheaply as possible along the way.
Market prices are driven a great part by big institutional investors and fund managers. They have the big money to buy up stock and support a higher price level.
With index investing, these professional investors sometimes can't buy small or mid-cap stocks unless they are in such indices as the S&P/ASX 300 Index (ASX: XKO) (Index: ^XKO) or ASX 200 Index (ASX: XJO) (Index: ^XJO). Even then, their own investing rules may still restrict them.
The higher a stock goes into the index listings, the more institutional investors notice its movement and can buy up shares.
As an individual investor, you have all the advantages! You can buy anything and hold onto it for decades if you choose. That's the power of long-term investing.
The big boys are watching up-and-coming stocks, but there may not be enough market momentum for them to go heavily into a rising company.
Here's one trick – Apart from doing your regular checks on a stock's growth and financial strength, also look at what percentage institutional investors own of the total shareholdings. If it is low like 20% – 30% or less, then there is a lot of room for future investment by the big market movers.
Usually you can find a list of substantial shareholders in the back of a company's annual report.
For examples of growing stocks with low levels of institutional investors on the share registry, I would look at Slater & Gordon Limited (ASX: SGH), FlexiGroup Limited (ASX: FXL) and Greencross Limited (ASX: GXL).
All are in the S&P/ASX 200 Index and had solid performance in recent years. I think they can carry on and even increase their business gains from here as well.
