COMMENT
When City Investors Buy And Sell

Thanks to the Companies Act, City funds and other large shareholders often have to reveal the shares they are buying and selling.

Essentially, the rules dictate that any investor that increases its stake in a listed company to more than 3% has to inform the company in question of the purchase. The company then has to update all other shareholders of the new holding via a stock exchange announcement.

In addition, any subsequent purchase that takes the holding beyond exactly 4%, 5%, 6% and so on requires a similar disclosure. Subsequent disposals that take a holding below an integer percentage also need a disclosure. And when a disposal brings a holding below 3%, a disclosure has to be made informing the company that the investor no longer has a 'notifiable interest'.

The rules are tighter for companies subject to a takeover (or have notified the market they are in takeover discussions). Here, the 3% level is reduced to 1%, and any shareholder owning 1%-plus has to disclose every trade. Disclosure statements are usually entitled 'Holding(s) in Company' on the regulatory newsfeeds. Good examples are these notifications concerning Marks & Spencer (LSE: MKS).

(A full rundown on the ins and outs of the disclosure rules (Sections 198 to 220 of the Companies Act) can be found in this magnificent post by discussion board regular JakNife.)

Sadly, the disclosure rules have several shortcomings, the main one being the statements are not obliged to reveal whether they were prompted by a purchase or a sale. Thus observers monitoring the goings-on within a company's share register sometimes have to plough through previous announcements and/or refer to the company's latest annual report (which ought to list shareholders with 'notifiable interests') to discover what the large players are up to.

There are other problems following big City players in and out of shares. For starters, you'll rarely buy in/sell out at the same price as the large shareholder, because the rules allow up to three days between the relevant trade and you (and the stock market) hearing about it.

Furthermore, it can be difficult (and most likely, impossible) to judge how important the stake is to the overall portfolio of the large shareholder in question. You don't want to be getting too excited about an institution buying shares when the fund manager is actually making a small side bet!

And of course, you'll never know exactly why, say, a managed fund is trading the shares. Disposals for example may be dictated by client redemptions, rather than prompted by the underlying company's performance.

Although occasionally quite informative, it seems shareholding announcements should really be of cursory interest for ordinary investors. Indeed, rather than keeping tabs on what the big-money professionals are doing, individual stock market success comes from developing your own skills and forming your own decisions. That said, it's always nice to see powerful investors buying into the companies you own!

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