Can Big Money Limit The Upside Potential For Facebook Stock?

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On the 4th of March, Eric Chemi announced on CNBC that Facebook (NASDAQ:FB) is now among the top 20 most widely held stocks. This is the first time that Facebook has made it on the top 20 list of the most held stocks among institutional equity investors.

Facebook surged from a ranking of 23rd in September and 35th at the end of the 2014 to 16th place according to data from eVestment provided to CNBC.com.

(Source: CNBC)

The list in the table above shows that Facebook is one of the most liked positions among institutional investors or big money. This is good because it shows that institutional investors have become increasingly bullish on Facebook.

However, Facebook’s fame among institutional investors might limit the stock’s ability to be defined as momentum stock. This is because there are compelling reasons that suggest that big money can deter Facebook’s upside potential moving forward.

First, institutional investors limit upside potential because their turnover is quite low. To start with, institutional investors spend a lot of money and time to hire researchers to carry out in-depth analysis for them before they take positions. This time-consuming process required to take a position keeps them locked in for longer. In building positions, these investors buy shares held by other firms before they hit the market and typically hold them. This reduces the overall volume of shares traded. Meaning that even though investors are bullish on the stock, the low volume will not reflect the bullish sentiment in the market. This might send out weak bullish sentiments to the market even if the sentiments on Facebook are really high.

This tends to reduce volatility, which is good when investor confidence is high in the stock and institutional investor are still building positions. However, the risk is when institutional investors decide to close positions. This is because institutional investors collectively hold a lot of shares, when they decide to close positions, they can create overselling in the stock. This negatively affects firms because its stock price can suddenly decline, and once they decline, these stock prices have a hard time trying to climb back up again.