In the stock market there are various ways to determine the value of a stock. However, ultimately it isn’t the analysts or stock brokers that determine the price of a stock, though they can have significant influence. It is what the investors are willing to pay to acquire that stock and what sellers are willing to sell that stock at, in other words, good old supply and demand. That demand is comprised of different investor types, some of which are willing to pay more for shares than others. The more investor types and investors that purchase shares, the higher the price will be for the shares, all else being equal.
Demand for Stock
In my work as Vice President of Corporate Development in the junior exploration and mining sector I’ve examined the most effective way to increase long-term share price by focusing on the demand for that stock. Demand is driven by several considerations, but always founded on a buyer’s willingness to buy and ability to pay for the purchase.
In the case of Demand for the stock of a specific company at a particular point in time is reliant on a combination of short-term and long-term factors. Short-term factors are things like recent media attention to the industry or even company, circumstances temporarily affecting the competitor’s ability to deliver product/service, fire, or theft. Long-term factors are more fundamental to the company and often directly connected to the business model, such as regulatory or legislative changes, management, institutional or major investor participation, or patent approvals.
Regardless of these influencers on share price, there clearly are examples of companies that demand a premium for their stock above and beyond their peers. If you look at these companies, in most cases they have demonstrated over a long period of time reliable, credible and capable management, consistent cash flow, consistent growth, excellent risk management within business operations, strong board of directors and what a diversified shareholder base. One of the advantages of this is that these companies are able to raise capital at a lower cost than its peers, thus further contributing the company’s competitive advantage in the market, which usually translates into improved profit margins and return on investment (respective to the risk level).
Shareholder Types
Demand for a publicly traded stock is largely based on the dynamic of shareholder types, such as:
1. Private equity firms. Companies that are set up to invest money from private individuals, families or companies into ventures that meet the goals of the firm.
2. High net worth investors. Individuals such as lawyers, doctors, business owners, who have high annual incomes and/or have accumulated significant net worth, or even inherited significant wealth.
3. Day traders. Individuals who speculate from a minute to minute basis in order to profit from the temporal fluctuation in share prices of various volatile, penny and blue-chip stocks.
4. Institutional investors. Firms (e.g. mutual funds) with large pools of funds gathered from many shareholders who either don’t have the skills to or don’t want to analyze and manage their own investments.
5. Individuals with a little savings they want to invest in the stock market. This can be anyone from a factory worker to a police officer looking to maximize the return from their savings.
Demand Dynamic
How can these groups be best marketed to in order to maximize share price? What combination of these groups is the most ideal at which stage and for a specific company?
Some companies go after institutional investors after they get approved to list on a public exchange. However, many institutional investors will not invest in a new stock until it acquires a certain level of market capitalization (number of shares times share price), shows a degree of liquidity (number of shares traded daily) and has a minimum per share price (usually at the $7/share level). The challenge with institutional investors is that they tend to invest in large blocks, want influence over the company and can also negatively affect the price if and when they decide to liquidate their significant position (increase in supply of shares for that period means the price drops).
High net worth investors (sometimes referred to as sophisticated investors) are a good group to have because they tend to invest in amounts that are between $50,000 and $200,000 at a time and tend to hold the shares for a longer period of time than the other shareholder types. They are also better to manage from a shareholder relations perspective, compared to individual investors who may invest as little as $2,000 but then call the company weekly for updates and discussions. High net worth individuals are more likely to want a monthly conversation for their $100,000 investment compared to individual investors who would require 200 conversations for the same investment level ($100,000/$2,000 = 50 calls X 4 weeks = 200 calls per month).
Individual investors are much more costly to manage but they do offer an advantage. Often they are willing to pay market price for their shares, whereas other groups will try and negotiate a block trade discount through a private transaction. The advantage is that these individuals can and often do actually help peg the price of the stock at a higher level. They are also good because even if one decides to liquidate their small holding, it is unlikely to have a notable impact on the stock price.
Day traders are a great shareholder type to have support your stock because they build liquidity. Liquidity helps to attract other investors groups who feel comfort in knowing they can quickly sell their shares if they have to. Day traders also help spread the word about the stock among their followers as they tend to be active in social media posts and discussions.
Strategy
To maximize the short-term and long-term price of a company’s stock, a good investor relations professional will have programs and initiatives in place to reach each one of the shareholder group types. But, before one starts to market the stock, there should be a strategy in place that pinpoints not just the proportion of their stocks that would best be held by each group, but at which stage of their development these groups would be most beneficial. This topic is much too complex and detailed to discuss in this article.
However, as a general rule you want as many types of investors form as many countries as possible buying some shares in your company. Individual investors are more likely to bid up the price because they don’t necessary buy the stock for maximum return on investment but because they have an interest in the story. Doctors are known to invest in companies because they can relate to the technology and see how it can affect their patients or society. The same holds true for many successful entrepreneurs and investing in related projects. Since these types of individual investors are likely to pay more for their shares than institutional investors, it makes sense that the more of them you have as shareholders the higher the price of your stock will be. It also makes sense that the less likely you are to have a block sell order from a shareholder the less likely your stock price is to take a quick dive.
Although there is more to how stock price is influenced, from a corporate development perspective, the above technique is one of the most cost-effective and quickest ways to maximize both short-term and long-term stock price. Other initiatives for improving stock price include shareholder relations, media relations, community recognition, investor group presentations, industry events and industry networking.