How CFOs Can Leverage the Internet to Generate Market Liquidity

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What has the Internet got to do with stock market liquidity? A CFO may ask.

While CFOs are busy interacting with other CPAs and MBAs like them, they shouldn’t ignore the impact the Internet has had on pretty much every corporate position you could think off across all industries, and leverage the growth waive to their advantage as part of their overall finance strategy.

Sounds very good in theory doesn’t it?  But what does it mean practically in terms of generating market liquidity?  Although some younger and more tech savvy CFOs may catch my drift, this material is likely Greek for the majority.  But fret not.  Technicalities can be handled by the IT or marketing department, while you focus on the fundamental principles underlying this discussion.

In as simple of a language, and as concise of terms, let me spill all the beans for you here.

It is a fact that market liquidity is critical to investors looking to buy shares in the next big thing.  So providing that you think your company is the next big thing, this discussion is very much relevant to you.

As of 2010, there were over 20,000 publicly traded companies in USA, of which 62% are micro-cap (market capitalizations of $250 million or less).  That is more than half.

But with the big boys dominating most stock market activity and charts, how does a smaller company create awareness and generate market liquidity?  Simple – Use Internet’s growth to target retail investors.

Here is a cold hard fact for you.  In just 3 years’ time, between July 2006 and July 2009, the number of Google searches has increased 28 fold to 76 billion searches per month.

Of the billions of searches monthly, or the hundreds of billions conducted annually, a good chunk of these are searches for the next big thing. A growing majority of investors now use Google and other Internet search engines to research and find new stock ideas.

The Hot Tip Stock Newsletter – A Form of Outbound Marketing

You may recall the “hot tip” newsletters promoting the shares of a particular company?  These newsletters are part of a push marketing strategy wherein stock promotion service companies solicit investors on behalf of their client (i.e your company in this case).

Companies are essentially pushing a message to potential investors.   Similar services come in forms of email blasts as well, especially in the penny stock arena.

Because companies are hungry for such services, several companies offering promotional website and email blast services have cropped up over the last few years.  Although with sound intention, these services create a very temporary awareness by sending email alerts to their subscribers or profiling the client company on their web sites.

Two things typically happen with the outbound “hot tip” approach:

1. Best-case scenario:  The “hot tip” services have inconsequential web site traffic or an ineffective email list, resulting in a complete waste of money for the company.
2. Worst-case scenario:  The top of the line services often charge high prices; in some cases, as much as $100,000 for a two to four week contract. Secondly, they tend to attract followers seeking the next 200% trade idea over a two-week period, not investors seeking to invest in companies with long term growth prospects.

What happens as a result is that speculative investors buy shares immediately following a web site feature or an email newsletter blast, causing a temporary spike in the stock’s price and trading volume activity.

A few weeks later when the promotion ends, investors hop skip to the next big thing, leaving the previously promoted company with its same old low trading volume and mediocre stock price. This is not the right kind of market liquidity you want.

This results in more damage than good, not only from a financial perspective but also from a reputation and investor confidence perspective.  The pumpers and dumpers take their quick profits and run away, while the long term and well intentioned shareholders are left holding the bad.  The market takes note of this and the overall effect is negative.

What Should Fundamentally Sound Companies Do?

Fundamentally sound companies with attractive growth prospects should stay away from hot tip newsletter type marketing approaches at all costs.

Rather, fundamentally sound companies should leverage the power of the internet and embark on proactive inbound marketing campaigns to get their message out to the investing populous and position themselves to benefit from the next investment waive.

The best way to pull or attract new investors who are searching for the next hot companies poised to take off is through inbound marketing.  The investor demographic is younger and more tech savvy today, thus you need to hang out where they hang out – and that is ONLINE!

Successful inbound marketing techniques involve the creation of corporate and management videos that investors want to see, company blogs that investors want to subscribe to, and useful content and tools that the investors will turn to when they need more information.   All of these channels can be interconnected and further amplified by use of social networking and media avenues such as Facebook and Twitter.

Deployment of corporate resources in this direction will provide Management with an avenue to communicate to investors and get the leadership message out there.  For example, a CEO can talk about the direction where the company is headed, as well as some of the initiatives in its pipeline.  It is a great way to build relationships with the investor community and over time attract market liquidity rather than beg for it.  Investors will come to you – you DO NOT have to run after them.

Using Investor Intelligence

A strong presence online also provides the company with analytics intelligence that can be used in conjunction with the corporate finance strategy.  Sophisticated website analytics enables a company to get to know their potential investor demographic.

For example, analytics can reveal where the investors are located, how they found your presence online, what they like reading about, what they don’t like reading about, how engaged they are in what you have to say, etc.  With use of RSS Feeds through your corporate blog, you can ensure you stay in front of your investor and maintain a long term relationship that you can call upon in the future.

I personally use Google Analytics data extensively when I contemplate the promotions and offers to launch across all my websites.  It helps me tremendously understand who my potential customer / reader is, what they are interested in, what keeps them on my websites, what turns them off and makes them leave, where are they from, when do they like to browse the internet, etc.  This information is invaluable for any business.

Concluding Thoughts on Generating Market Liquidity

Instead of begging for capital in the open market, which doesn’t exist for many companies as they have dried up or simply don’t have the appetite to fork up cash, CFOs and corporate finance departments can incorporate the use of Internet in their overall corporate finance strategy.  By doing so, you will attract liquidity capital to you rather than chase after it

Successful corporate finance departments will tell you that the best time to raise financing is when you don’t need it.  So regardless of your current position today, take measures to position your company so that when need arises, all you need to do is pull the trigger.

How can you do this?  By proactively preparing and positioning yourself to take advantage through effective use of the internet.  I will write about why every company needs a blog, a Facebook Fan page and a Twitter profile next.

If you are a CFO (hypothetically), what do you think about this?  If you are not, print out this post and take it to your CFO.  What are your overall thoughts? Please share . . .