The Growing Influence of Retail Investors for Small Cap Companies: How to Attract Self-Directed Investors
“Self directed” or retail investors, are often overlooked by small cap companies in an investor relation plan. It is perhaps understandable, given retail investors, on average, account for just 14% of the typical large cap Australian company; whereas institutional investors hold 60% of the shares on issue – almost four times that of the combined retail cohort.
A retail investor is an individual non-professional investor who buys and sells securities for their own personal accounts and often trades in dramatically smaller amounts as compared to institutional investors.
However, the importance of retail investment goes beyond the capital this segment provides, particularly for ASX-listed small cap company stocks.
Retail Investors – King of Small Caps
The proportion of shares held by retail investors increases as company size decreases. Said another way, small cap companies typically have a higher corporation of retail shareholders, as large institutional shareholders (such as super funds), do not have the mandate to invest in smaller (often highly speculative) companies. It is not uncommon for micro-cap companies, companies with a market capitalisation under $500 million, to have a share register made up almost entirely of retail shareholders.
Enhanced Liquidity
It is worth mentioning that while many listed companies tend to focus on institutional investors, given they have the most investment clout, institutional investors are typically net sellers over the long-run. Typically, retail investors are net buyers (more likely to “set and forget”). Retail investors are often responsible for pushing up a Company’s share price on-market, rather than receiving stock via an institutional placement or other capital raising transaction.
The quality of the investor is important however – medium to long term retail investors are ideal and can add relative stability to a shareholder base, while high turnover “day traders” are not, generally speaking.
The Communication Issue: Content is King
Small caps cite communication as one of the biggest barriers for reaching their often large retail investor base.
In our view, the best way to reach a large retail investor cohort is online. Having a digital investor marketing plan built on compelling content is key. ‘Content is king’ is an old adage in marketing and communications but is equally applicable to investor relations. ‘Content’ refers to any material that an investor consumes: an ASX release, a company factsheet, a presentation, a video, podcast or email mailout.
The most effective channels for reaching self-directed investors include:
- Company announcements
- Email direct marketing
- Company website
- Social media
- Virtual meetings (webinars and AGMs)
The Power of Social Media for the Investment ‘Herd’
Social media has become an integral part of marketing for listed entities. Investors are increasingly using information gleaned from social media in their research process. Thus, we recommend social media marketing as a low cost, effective way to communicate with a large investor audience, particularly retail investors.
Digital usage among investors for research is now ubiquitous, with 98% of investors reporting that they use digital sources to investigate and conduct research.
Moreover, 88% of investors are making decisions based on information they have learned online. (This is up from 70% in 2021 and represents a step-change since 2015, when only 41% made investment decisions from digital sources). In a way, self-directed investors who consult social media are trying to get an information advantage and are not relying on company information and traditional news sources alone.
This emphasises the need for small cap companies to create shareable content, where investors can inform their friends and followers, perhaps seek validation, and get a forum of opinion on investment decisions.
Retail Investment is On the Rise
Retail Investment is on the rise – get in touch if your company wants to communicate with this growing cohort of investors.
Nearly 30% of companies have seen an increase in retail investment over the past 12 months. Where there is a growing market, comes growing opportunity.
Need help developing your retail investor communications strategy? Get in touch with Investability today.
