Controlling shareholder, public holdings, and liquidity: who really owns the share?

A controlling shareholder is someone with real power to influence the company—it can be a private individual, a family, an investment fund, or a group of investors acting together. They do not always have to own more than 50% of the shares in order to control the company; if the remaining shares are dispersed among many small investors, a lower holding can also allow them to appoint directors and determine where the company is headed.

A strong controlling shareholder can be a positive thing that gives the company stability, vision, and long-term commitment. On the other hand, they have the power to decide sensitive matters: executive pay, dividend distributions, mergers, and even transactions between the public company and other private businesses they own (related-party transactions).

Public holdings are all the shares held outside the hands of controlling shareholders and interested parties. This term defines how much of the company is “free” for trading (Free Float).

Investors tend to confuse the two, but they are two complementary measures:

Tradability

Quantity and volume of activity: How many transactions are made in the share each day, what its monetary trading turnover is, and how many shares change hands.

Liquidity

Quality of the ability to act: How easy and quick it is to buy or sell the share at the current price, without your action causing the price to soar or crash.

You can think of it this way: tradability is the quantity of activity. LiquidityThe speed and ease with which money can be withdrawn from an investment and converted into cash in a bank account without significant penalties. is the quality of the ability to exit and enter.

A share can trade every day, but if there is a large gap between the buying price and the selling price, or if there are very few buyers and sellers at each price level—it is still not truly liquid.

When few shares are held by the public, the trading structure becomes very thin. In this situation, every small movement of money moves the chart dramatically:

• If one buyer tries to purchase a relatively large quantity of shares and there are not enough sellers in the market—the price will fly upward.
• If a pressured investor tries to exit the position and there are not enough buyers on the other side—the price will crash sharply.

The common mistake: looking only at the price chart

Many investors see a share that has jumped 20% and assume the company has made an extraordinary business breakthrough. In practice, it may be an illiquid share that rose only because someone bought shares for just a few thousand shekels. Before getting excited about the chart, check whether there is a real market behind it or only a handful of random transactions.

Public holdings also play a decisive role behind the scenes of ETFs and index-tracking funds. Stock exchange indices do not determine a share’s weight only according to the company’s total value, but use a formula that takes the value of its public holdings into account. The stock exchange explains that a share’s weight in an index expresses the ratio between the value of its public holdings and the total value of the public holdings of all the shares in the index.

This means that a huge company with especially low public holdings will receive a small weight in the index, while a smaller company that is very widely “distributed” among the public will receive a high weight. Because ETFs are required to buy the shares exactly according to this weight, the rate of public holdings directly affects the automatic flow of money that reaches—or does not reach—the share.

It is important to clarify: not every share with a strong controlling shareholder is a bad share, and not every company with low public holdings is a poor investment. But these characteristics create risk, and when the following signs light up—you must stop and check:

• Control that is too absolute: If the controlling shareholder owns almost 100% of the shares, the public is only “decoration,” and your opinion at meetings will change nothing.
• A trading desert: Especially low trading turnover means one thing—on the day you decide to exit, you may not find any buyer on the other side.
• A hidden purchase tax: A spread that is too wide between the buying and selling prices means you lose money merely by executing the transaction.
• An insiders’ celebration: A large number of transactions between the company and the controlling shareholder or their private companies is a classic warning sign. You need to make sure that money is not leaving the company on questionable terms.
• A flight of brains (or money): When interested parties and senior executives sell a significant volume of shares, you must ask yourself: “What do they know about the company’s future that I do not know?”
• Creeping dilution: Private placements that are repeated again and again for the benefit of certain investors, reducing the public’s share of the pie.
• A frantic chart on empty: A share that moves sharply up or down following small transactions of a few thousand shekels. This indicates zero liquidity.

1. Tel Aviv Stock Exchange—Public Holdings and Interested Parties in Shares—A data page that presents the value of public holdings and interested parties in shares traded on the stock exchange.
2. Tel Aviv Stock Exchange—Determining a Share’s Weight in an Index—An explanation of the connection between the value of public holdings and the share’s weight in stock exchange indices.
3. Tel Aviv Stock Exchange—Key Data for a Security—The data pages for shares show trading data such as average daily turnover, median turnover, and additional data that help assess tradability.