Stock Promoters Explained

By Angel Broking | Published on 24th August 2020 | 155

Stock Promoters Explained

Fundraising from different investors is one of the primary activities of a company. A business may need additional funds from the market for various reasons, ranging from bolstering their capital base, to pay debts, execute expansion plans, and more. Companies that want to raise public capital for the first time need to register themselves in the stock exchange. This process is called ‘listing.’ The company then releases its shares called IPO or initial public offerings. The success of the IPO launch has a significant impact on the company’s plans. If the IPO launch is a success, the company will receive its desired funds, but in case the investors don’t subscribe, the company may end up incurring a considerable cost. So, they hire stock promoters to help companies create awareness among investors about upcoming IPOs.

What are stock promoters?   

Stock promoters are individuals or organisations appointed by a company during a pre-IPO launch to help the company float the IPO scheme. The stock promoters assist the company in achieving its target to raise money, creating awareness among investors. They are the marketers who devise strategies to help a company explore the different ways to raise funds, not just the equity route.

Share promoters bring information about specified investments into the focus of potential investors, both domestic and foreign investors. Their goal is to channelise market capital to the investment options they intend to promote.

Depending on their roles, share promoters are divided into different categories. Let’s discuss them one by one.

Penny Promoters

The role of penny promoters is often judged under the microscope of ethical practices. Investors consider penny stocks dubious as not adequate knowledge is available on these stocks. In India, the term penny stock includes any stock trading below the value of Rs10. The practice of using stock promoters in the penny stock market is relatively standard. They create excitement in the market about the shares and bring it to the notice of potential investors.

Penny promoters have an important role to play in promoting start-ups. They incite confidence among investors regarding future performance of a start-up.

Investing in penny stocks is highly speculative but can also result in high gain. You can leverage the chance to invest in some very good quality stocks with the potential to perform at an attractive rate. Some of these shares will present with massive growth potential, increasing your income manifold. Then, why are the penny stock promoters criticised? It is because some of them create misleading hype around a stock by promoting false information about company performance and financial metrics.  It increases the risk for investors.

Promoters Specialised In Government Securities

The promoters specialised in trading in government securities often buy them at auctions and then sell over-the-counter to retail investors. These promoters function as intermediaries between RBI and general investors who don’t have Subsidiary General Ledger (SLR) or Current Account (CA) with the RBI.

Casual Promoters

Eventually, general investors would turn into casual promoters when they encourage others –  friends or family to invest in individual stocks. If an investor earns a good profit from a stock, they will share that information with fellow investors, creating further demand for company shares.

Tools Used By Stock Promoters

There are several marketing strategies that stock promoters use to attract the attention of potential investors.

  • Cold calling:They would randomly call investors to share information on upcoming IPOs, G-sec bonds, debt securities, and more.
  • E-mails:Emailers are the other option that allows promoters to send out information in bulk.
  • Social media:Stock promoters are increasingly leveraging social media to incite investors with new investment opportunities.
  • Company reports:Some stock promoting firms would prepare an investment report on companies with a detailed description of company performance and financial statements.

Conclusion

While stock promoting is a common practice used by companies to create awareness in the market about company stocks, some promoters are also found indulging in falsifying investment information to deceit investors. Investors, therefore, should take care of their investment choices – extensively investigating the background of the company they intend to invest and trust information coming only from authentic sources before investing.