Institutional investors are responsible for the majority of trading in the stock market. Naturally, small investors want to hitch their carts to these big horses, but institutions don't make it easy. Luckily, IBD 's proprietary Accumulation/Distribution Rating can help you stay in step with the big money.
Institutions generally don't publicize their investments. They may say which sectors they tend to lean toward, but the specific holdings are not made readily available. Mutual funds will disclose holdings once per quarter, but that information can become outdated very quickly.
Individual investors are a drop in the ocean. Mutual, pension, and hedge funds have billions of dollars of buying power. Once a large fund decides to buy a stock, they will spend weeks and months purchasing shares until they fill out their position. Buying thousands or even millions of shares in a single stock is hardly subtle. This is where the A/D Rating comes in.
How To Buy With Accumulation/Distribution Rating
The Accumulation/Distribution Rating is a calculation that measures daily price and volume changes of a stock for the prior 13 weeks. The stock is then assigned a rating from A though E and may include a plus sign for fine tuning. A stock's A/D Rating is updated daily.
A rating of A or B indicates that funds are buying, or accumulating, the stock. A rating of C is neutral, and a D or E indicates net selling, or distribution.
We are looking to buy stocks with an A or B rating, while the neutral C rating can be acceptable. Ratings of D and E should be avoided because the heavy hitters are unloading them.
You can find the Accumulation/Distribution Rating in the IBD Stock Checkup and stock quotes at Investors.com, on MarketSurge in the left hand data box, as well as IBD Weekly, in the stock tables and mini-charts.
How To Buy Stocks: One Of Many Tools
A word of caution: An A rating does not necessarily mean you should buy the stock. Institutional investors can be wrong; they are still human after all. The Accumulation/Distribution Rating should be one of several tools in your investing toolbelt.
Check it alongside a stock's Earnings Per Share Rating, Relative Strength Rating and Composite Rating, which combines these major proprietary ratings into one.
Look for stocks breaking out of well-formed bases with above-average volume. And as always, make sure the market is in a confirmed uptrend. Under IBD's Market Trend you can find the Big Picture column with daily updates for the overall market.
