The Rise of Retail Investors: How Public Companies Should Manage the Masses
While most management teams tend to view investors as strictly institutional — professionals putting capital to work for mutual funds, hedge funds, family offices, asset managers, etc. — “retail investors,” individuals investing their personal capital, are continuing to become a bigger and more influential part of the investor landscape.
This emerging community of investors runs the gamut in terms of profile and motivation. They’re day-traders moving in and out of stocks on an everyday basis, individuals controlling the execution of their retirement funds, households investing for the future, true speculators looking for high-flying returns, and everyday people simply looking to generate extra cash.
A litany of factors make today an extremely attractive time for retail investors to jump into the market. Recent tax cuts have given back dollars to the average investor, consumer confidence is at its highest point in nearly two decades, and the equity markets continued to hit high water marks in January. Plus, investing in equities has never been easier or less expensive — anyone with a smartphone and a bank account can buy and sell stock.
Small- and mid-cap healthcare companies can be prime targets for retail investors. Many healthcare companies operate within vogue sectors like chronic diseases, robotics, and digital health, which are highly publicized. On top of that, many small- and mid-cap companies have share prices that are low enough to offer a significant perceived upside. Lastly, the value of many public healthcare companies can be attributed to seemingly binary events — such as clinical trial outcomes or FDA approvals — making speculation simple.
So as the management team of a publicly traded healthcare company, why should you be cautious about retail investors?
Retail investors can cause unanticipated volatility in your stock. Individually, these retail investors can’t drive your share price up or down, but collectively they can. Making matters worse, these swings in value often occur for seemingly non-existent reasons, making them hard to predict and even harder to prevent. This is due to a few main factors:
- Retail investors have a different understanding of your business than institution investors. Your typical retail investor doesn’t read equity research analyst reports, doesn’t pour over SEC filings, doesn’t attend investor conference presentations, doesn’t have access to the management team, and doesn’t commission in-depth industry diligence prior to making an investment decision. Though you publicly disclose a high level of detail about your business in various forms, retail investors are going to have fundamentally different (read: lesser) understanding of your business than institutional investors.
- Retail investors seek out different information than institutional investors. Often times retail investors will head to social media, online forums, investor-focused websites, and online news sources for information about, and updates on, your company. This can be worrisome as these largely unregulated sources can be fraught with inaccurate information, non-expert opinion pieces, un-verified short reports, rumors, and speculation, which can lead to a misinformed or manipulated retail community.
- Retail investors react to information differently than institutions. The retail investor is inherently different than the institutional investor for the reasons listed above, and as such they are going to react very differently to various pieces of information. This is where you can really run into problems. Generally, you can assume how the institutional investor will react to a certain piece of information (positively or negatively) because of the shared knowledge you both have about the implications of the information. It is much harder to predict how the retail investor will react to that same information — especially when it comes to more technical or nuanced details found in filings like 8-Ks, S-3s, Form 4s, etc. Sadly, the retail community is also subject to manipulation via “fake news” that might be completely overlooked by the institutional investor — allowing unsubstantiated rumors or inaccurate commentary to snowball amongst the group.
Now that you understand why it’s an important group to consider, how can you manage your retail investor base?
Monitor social media and web-based investor forums. By monitoring the chatter on these sites, you are about to check the pulse of the retail investor community and stay up to speed on what is driving their decisions. The insight you receive here can be helpful is shaping your communications going forward.
Ensure all helpful information is easily accessible. Often times retail investors are not tuned into your IR communications, despite your best efforts. By making relevant information current and readily available on your website, you can proactively address many of the questions and concerns your audience might have.
Establish policies for responding to IR inquires. Determine who will respond to inbound investor communications, both email and phone, in order to avoid creating confusion or duplicated efforts. We would also recommend creating Reg FD-approved scripted responses to frequently asked questions about current events to ensure the message provided is accurate, consistent, helpful, and legal.
Consider expanding your company’s IR touchpoints. Often times a company’s public relations and marketing communications are widely dispersed across a variety of media, but investor relations are limited to certain financial press outlets and your IR website. By expanding the reach of your IR communications to channels where retail investors are consuming information, you have a better chance of controlling your company’s message.
For more tips on managing your company’s IR efforts, download our eBook, “Westwicke Insider’s Guide to Investor Relations.” If you’re in need of a more personalized approach, feel free to get in touch.
Mike Vallie is a Vice President on Westwicke's medical technology and diagnostics teams. He has extensive experience in financial planning and analysis. He has a BS from George Mason University and an MBA in finance from the Robert H. Smith School of Business at the University of Maryland.
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