Last week our class discussions focused on different publics investor relations officers communicate with. We talked about sell-side, buy-side and retail investors. We decided that investor relations officers should concentrate much of their efforts on the institutional buy-side. Yet, a recent article I found claims a different position.
An article on IR Alert blog gives 5 reasons why retail investors are an important audience for an IRO. Yet, the article misses a significant reason about why IROs are not actually focusing on retail investors as much as the article's author wants them to. Or, to be precise, the article misses all five of them.
1. The article claims that retail investors like to talk among themselves and with the management. Well, this is true, but this is exactly why they are a nightmare for an IRO. Would your CEO rather meet with 100 retail investors who together own 0.5% of your stock or with 1 fund manager who owns 3% of your stock? I think the answer is clear. And I am not even talking about managing and organizing the event.
2. The article interestingly enough claims that retails investors are smart. Some - maybe, but some are definitely not. And some - are not even close. I had a pleasure of dealing with retail investors when I worked as an IRO - most often, it was not fun.
3. The article claims retail investors purchase stock in small amounts and thus do not cause any change in stock price. Well, that's in my mind a reason to pay less attention to them rather than more.
4. The article claims that retail investors in comparison with fund managers are not measured by monthly or quarterly performance and thus they can hold your stock longer. Well, although retail investors are not formally measured against some metric, there are different retail investors as well as different institutional investors. Some trade stock on any smallest movement, while others can hold it for years. The issue, at least in my mind, is that sometimes the logic in retail investors' behavior is missing or at least hard to predict. I can understand what moves the pension fund with a known investment strategy, but what would case a retail investors to suddenly buy or sell my stock is more difficult to understand and thus predict. And since each one of them owns a tiny percentage of my stock, I typically would not have time to figure it out anyway.
5. I read the article a couple of times, but I cannot find the reason number 5 for paying attention to retail investors despite the fact that the title of the article claims that there are exactly five reasons.???
Overall, I am not saying that retail investors are not important, but I doubt they can be more important for an IRO than institutional investors. There is a chance they can smooth out volatility in the market, there is a chance they will hold your stock for long time, there is a chance they will ask smart and intelligent questions, but there are probably as many chances that their behavior will be quite the opposite. And then again, how much of your stock do they actually own?