By Ron Weinberger
More than 7,700 publicly traded companies are listed on North American stock exchanges, generating up to 3,500 press releases each business day. As if that weren’t enough of a challenge, the average stockbroker follows fewer than 15 stocks.
“What differentiates your company from the tens of thousands of others; and why should anyone follow your stock, let alone buy it?”
The answer? A well-designed investor relations program.
Time and again, investor relations programs have demonstrated their value by engaging shareholders and the investment community, and building a base of awareness and understanding for publicly traded companies. A key component of any successful investor relations program is a clear understanding of the 18 investor relations challenges faced by all public companies. Do you know what they are, and is your company addressing each of them? One of the most important challenges involves shareholders. This leads to Investor Relations Challenge #1.
SHAREHOLDER ACQUISITION AND RETENTION
One of the most frequent comments I hear from company presidents and CEO’s is, “We need to broaden our shareholder base to increase our trading volume and drive our share price up.”
I respectfully disagree. One of the basic principles of business is that before a company focuses its efforts on acquiring new customers (i.e. new shareholders), it should work on fostering and maintaining relationships with the ones it already has. For a publicly traded company, investor relations (IR) is the key to successfully accomplishing this task.
As part of a company’s investor relations program, the IR professional should regularly contact all major shareholders. The key is to inform these “customers” of current developments and planned initiatives, and give them an opportunity to share their feedback about the company’s performance.
This approach ultimately yields a number of benefits:
- Enhanced awareness of the company plans and activities;
- Greater confidence in management practices;
- Revitalized investor interest;
- Improved shareholder loyalty, which encourages additional share purchases and minimizes the selling of stock;
- Increased likelihood of word-of-mouth recommendations from existing investors, who encourage others to watch the stock and possibly buy it;
- Invaluable source of investor feedback and ideas that can be acted upon.
Leveraging shareholders this way capitalizes on their vested interest in the company’s stock performance, and will likely motivate them to help the company by providing leads, introductions and feedback, when asked. Stockbrokers, investment advisors and institutions have additional incentives including the stake of their reputations, their funds’ performance rankings and their bonuses.
One thing many investors consider before making an investment decision is the volume of a company’s stock that is regularly bought and sold. This leads to Investor Relations Challenge #2.
STOCK TRADING VOLUME
Investors want the comfort of knowing that when they decide to sell all or part of their stock, there will be sufficient demand among buyers willing to purchase it. They are less inclined to buy a stock that trades “by appointment” (low trading volume) than one with more liquidity (substantial trading volume). Often the challenge with low volume stocks is not to buy them, but to sell them. An insufficient number of Bids (orders to buy) makes it more difficult to execute a sell order.
In addition, thin trading volumes can cause large price fluctuations. It is not uncommon to see a few orders create a price swing of 5% to 15%. “Hitting the Bid”, a situation where the seller places a large market order, relative to the size of the Bids, further perpetuates price swings.
Investors are not the only ones seeking ample stock liquidity. Senior managers of public companies often tell me they want increased trading volumes in their own company’s stock as well. However, the vast majority of them are uncertain how much of an increase is desired. What they are certain of is that their stock is undervalued and doesn’t have enough volume.
Another reason trading volume is so important is because stock can be used by the company as a form of currency. The more liquid a stock is, the higher its value as currency and the easier it is for the company to raise money, make acquisitions, and attract stock investors and traders.
Something to keep in mind, hypothetically speaking, the trading volume of a company’s stock could more than double and the stock’s value could go down. This leads to Investor Relations Challenge #3 which will be discussed in my next article.
Ron Weinberger, principal of R. Weinberger & Associates Inc. has successfully created and implemented investor relations programs for more than a dozen publicly traded companies over a 14-year period. Contact Ron at [email protected] or 800.621.3130
Since 2005 ITB Solutions has provided listings development services to stock Exchanges in Canada such as the Canadian Securities Exchange. ITB Solutions currently provides New Listing Services to the NEO Exchange. We assist companies with the listing application and managing the process to become publicly tradable in Canada, as well as offering advice on how to make the most of your public listing. You can reach Jeffrey Stanger at 647-500-0492 or by email at [email protected]