Who’s doing this to our stock?

BlueCandlestickGraphAs investor relations people we should always, always be students of the market. We should keep on digging to understand capital markets as a whole – and specific supply-and-demand dynamics of the stocks we are hired to understand.

I like the perspective offered by Tim Quast, managing director of Modern IR, an equity market analysis and consulting firm, in a post called “Did a Market Strand Snap?” in the company’s online Market Structure Map. He describes the market for your company’s stock as three strands braided together:

If the three-strand cord that constitutes your price and volume braids rational investment, speculation and risk-management, which one just snapped? Anyone? Anyone?

To refresh, we at ModernIR say most buying and selling in the markets comes from those three sources. There are real, rational investors deploying capital and taking profits, and portfolio managers adjusting their asset balances and associated hedges to manage risk. Around those, speculators engage in various trading tactics. We believe at least 95% of volume for a given issue ties to one of these threads. Sometimes human traders drive it and other times computers do. The machines dominate today.

So something dramatic happens to your stock. “Who’s doing this?” Is it real investors, who after all are the target of almost all IR activity – and the people CEOs and CFOs like to think about? Is it a subset of managers putting on a particular hedge, which may move your stock because of industry, index membership or some kind of arcane characteristics? Or are you being swept up in a speculative play?

Not easy questions to answer, at least without support from outside sources. But Quast walks through a scenario for narrowing the causes of a big move in your stock, mostly by elimination, and offers good examples of factors to consider. And he says something important about the role of the IR function:

If your stock suffers declines and your bosses and Board members are pacing outside your office, educate them. Explain that investment drives price but a third of the time, with speculators chasing rainbows and portfolio managers modulating risk, behind the balance.

Here’s the clincher: that means two-thirds of the time, it’s somebody else’s fault. … If you have the power to show execs that selling decisions aren’t about you but are due to portfolio risks, well, that’s valuable. And when you use it to set internal expectations and measure external outreach, it is power indeed.

So IR can be more than cultivating relationships, answering phones, going on road shows – not to minimize these core activities. IR can be the place where people come for knowledge of the markets and understanding of your company’s stock.

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