Increasing Your Company’s Stock Trading Liquidity with IR Firms

Ronald Woessner  |


This article explains how smaller-cap companies with illiquid stocks can create sustained, significant trading volume with investor relations ("IR") firms, thus enabling them to attract investment firm capital and investment analysts. Sustained, significant trading volumes are necessary to attract investment firm capital and investment analyst coverage, as illuminated in earlier articles of mine.[1]

CEOs of smaller-cap companies with illiquid stock trading volumes often ask me, "How do I create sustained, significant[2] trading volume in my company’s stock?”

The answer is simple. The company needs to attract Main Street (retail) investors, rather than Wall Street (investment firm) investors. When enough retail investors begin buying and selling a company’s stock, the trading volume will increase to a sufficient level such that an investment firm will consider making an investment in the company.[3]

Attracting retail investors typically requires your company to hire an IR firm to perform “market awareness” activities, i.e., efforts directed to informing potential Main Street investors of the opportunity to purchase the company’s stock through the open market.

Company CEOs also often ask me: “Why is it necessary to hire an IR firm to get “more eyes” on my company’s stock; isn’t producing excellent financial results, or having a unique product, or having a compelling business model, or having a huge market opportunity, etc. – isn’t that enough to attract Main Street investors?”

The answer is … “No – that’s typically not enough. Sorry.”

Think of it this way. There are approximately 15,000 publicly-traded companies in the US, including those traded through the over-the-counter (OTC) market. Common sense suggests that the average Main Street retail investor is NOT going to find your company's stock from among these 15,000 companies without your company implementing targeted, effective initiatives to “market” your stock to retail investors.

Of course, there are companies that do not have to implement stock marketing campaigns to attract retail investors: some CEOs are well-known and have a public following, or the company otherwise has become known to the investing public, or the company is in a "hot" investment sector (biotechnology, cannabis, etc.). The reality of the capital markets is this: a company that does not fall into these categories must implement targeted, effective initiatives to "market" its stock to Main Street investors and motivate them to purchase the company's shares through the open market in order to achieve sustained stock trading liquidity. Period. Paragraph. End of discussion.

The next questions invariably are: "What exactly do investor relations firms do, anyway?" and "What initiatives are effective in marketing an illiquid company stock to Main Street investors to create sustained, significant stock trading liquidity?"

The services performed by investor relations firms often vary from firm-to-firm. The services typically performed by investor relations firms appear below: some firms perform all of these tasks, while some perform only a few.

One IR firm may NOT actually offer all of the above services. In fact, your company may not need all of these services. It is remarkable how often it turns out that a particular IR firm that is heavily courting your company does not provide the services your company actually needs. Hence, as the CEO or CFO, you need to be thoughtful about which of these services your company actually needs and compare that list to the services the firm actually provides.

The next question for examination is: which of the services above are actually effective in bringing your company to the attention of retail investors who might actually purchase your company’s shares through the open market? Be aware that IR firms typically do not work on a contingency basis and expect to be paid a monthly cash retainer (and perhaps an additional equity "kicker"); hence, you will want tangible and measurable value from hiring an IR firm.

Different people have different views of the efficacy of the services noted above in increasing sustained, significant stock trading liquidity. See below for my opinion as to which of the aforementioned services are effective at creating sustained, significant stock trading liquidity for a currently illiquid company stock:

In sum, as a practical matter, a “mosaic” of the "yes" activities are usually necessary to attract retail investors in sufficient quantity to create sustained and sufficient trading volume to attract investment firm capital. Further, some of the "no" activities have value as well; they simply do not have material value in creating sustained, significant stock trading volumes.

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There are dozens of reputable IR firms. Caveat emptor: there are also many more that are disreputable or reputable, but ineffective.

Generating sustained, significant trading volume is a combination of art and science, similar to creating and executing an effective investment "pitch." What works for one company will not necessarily work for another.

Good luck! Connect with me through LinkedIn if you have questions.

Up next: Beware the short-seller attack and "bear raids."

© Ronald A. Woessner

December 31, 2018

Mr. Woessner mentors and advises companies in the start-up and smaller-cap company ecosphere and helps them raise capital. He also advocates in Washington DC for policies that create a more hospitable public company environment for smaller-cap companies, enhance capital formation, support small business, promote entrepreneurship, and increase upward mobility for all Americans, particularly minorities. For more information on Mr. Woessner's background, see https://www.linkedin.com/in/ronald-woessner-3645041a/.

[1] See the article here (stock liquidity necessary to attract investment firm capital) and here (stock liquidity necessary to attract investment analyst coverage).

[2] The article here explains how to estimate the trading volumes that will be necessary to attract any particular amount of investment firm capital.

[3] An earlier article illuminated that stock trading liquidity is a necessary, but not sufficient, condition for an investment firm to consider making an investment. In addition to stock liquidity, the company typically must have a compelling business model, large market opportunity, credible management, excellent products, etc.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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