Investor Relations

Summary

Investor Relations is a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company's securities achieving fair valuation. The term describes the department of a company devoted to handling inquiries from shareholders and investors, as well as others who might be interested in a company's stock or financial stability.

Investor relations professionals therefore need to link communications to a company’s strategy and “vision” as frequently as possible. Increasingly, the investor relations function is getting involved in actives traditionally handled by PR and media relations professionals and communicating with many of the same constituencies. In addition to a solid understanding of finance, then, IR professionals also need strong communication skills.

How do companies attract and retain investors? First they need to have a framework for managing investor relations. The following section addresses the key objectives of investor relations and also provides a framework for implementation of a successful IR program:

• Explain the company's vision, strategy, and potential to investors and "conduit constituencies" such as analysts and the media: they need to get messages about company results and potential future results across as understandably as possible to the investing public.
• Ensure that expectations of the company's stock price are appropriate for its earnings prospects, the industry outlook, and the economy: IROs need to understand investor concerns and expectations for their organizations and relay this information to management.
• Reduce stock price volatility: It is critical for a company to have strong IR capabilities to maintaining a stable stock price and shareholder base. Also, IROs often have to respond to market news or events that have the potential to affect stock price negatively in the short term.

There are two types of investors—investors (individual share holders) and institutional investors (pension funds, mutual funds, insurance companies, endowment funds, and bank). Because different demands on the IR department require the use of different communication channels, therefore, a company's should address both investors by using different IR strategy.

• Institutional Investors: they have larger holding than individuals and trade more actively, and thus they can have a greater effect on stock price volatility. For instance, institutions can be broken down into groups based on portfolio turnover (high, moderate, and low) as well as investment styles (e.g. growth, value, income, and index)
• Individual Investors: compared to institutions, they have smaller account sizes and generate lower trading volume. They may own stock directly, or through mutual funds, company stock plans, or 401(k) plans.

About intermediaries, in particular, the media and the analyst community are the key conduits. Companies provide information to intermediaries through conference calls highlighting quarterly achievements, press conferences announcing annual financial results, and face-to-face meetings to discuss company developments and strategy.

• The Media: media coverage of business can have a dramatic effect on a company's stock price. Having a strong media relations function coordinated with the IR department will be beneficial to a firm’s investor relations effort by maximizing access to media outlets and ensuring consistency in the messages each group sends to the media.
• Sell-Side Analysts: buy-side analysts typically work for money management firms and research companies for their own institutions' investment portfolios. Sell-side analysts cover stocks within certain industries and generate detailed research repots that offer “buy,” “sell,” or “hold” recommendations.
• Rating Agencies: these agencies analyze companies in much the same way that buy-side and sell-side analysts do, but with a specific focus on their creditworthiness. They make their ratings available to the public through their ratings information desks and published reports; AAA, Aaa, BBB, Baa and the lowest are D and C, representing companies that are in default of existing loan agreements.

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References:
http://en.wikipedia.org/wiki/Investor_relations