There are few certainties in a volatile market and, on the back of a pandemic, with a war continuing to rage in Europe and inflation causing concern around the world, the market is difficult to predict. There can be conflicting messaging from experts, so being able to tap into shareholders’ perceptions directly and understand their outlook on your company and the market in general is important.
Examining investor sentiment allows you to more effectively plan your strategy in the financial markets, improve your investor relations activities and show shareholders that you are keen to engage them.
This article helps you understand why gaining insight into investor sentiment is important, how to gauge it effectively and how to truly understand the market’s view on your offering.
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The role of investor sentiment in financial markets
Investor sentiment represents what the market believes to be the value of a stock based on emotion, rather than the actual value of the product based on fundamental financial performance data. Even when a financial product is performing well, negative sentiment can affect its position on the market.
This means that investor relations officers (IROs) must be clear in their messaging to the investment community. Any ambiguity over the nature of news and announcements from an issuer could lead to misinterpretation and, as a result, the market losing confidence in that product.
Issuers should endeavour to understand investor sentiment before taking actions, such as mergers, acquisitions or changes in leadership. If the market responds negatively to the suggestion, it could be an indication that the stock price might be affected if the company proceeds.
Factors influencing investor sentiment
There are many factors that influence investor sentiment. Of course, verified financial and non-financial performance reports are rational factors, but there are also a host of irrational, emotional influences that affect how a product is perceived on the market.
These include:
- Cognitive bias, where something seems to be correct, so the investor believes it to be correct. For example, this might include confirmation bias, where they make a judgement about an investment and only take heed of opinion pieces that support that view. Another example is the bandwagon effect, where the investor waits to see what others are doing before making their decision.
- Emotional bias, which is based on feelings rather than facts. It could be sticking with a stock even though it is dropping in price because they feel that it is the most worthy stock on the market or when someone trades over confidently because they believe they are more skilled than other shareholders.
- Social influences, such as the run on Gamestop stock coordinated by users of the website Reddit in order to boost the price and create a challenge for short sellers.
Types of investor sentiment
Here is a guide to the different types of investor sentiment:
Type | Explanation |
Optimistic | Optimistic investors, often referred to as ‘bulls’, display confidence in the market and the product in which they are investing. They foresee growth and invest accordingly. |
Pessimistic | Pessimists are called ‘bears’ and look to sell investments they believe are on a downward trajectory or refrain from making additional investments. |
Neutral | Neutral investors see little movement in the price of their investments and can develop strategies to profit from this sideways movement. |
How to gauge investor sentiment
Conduct investor perception studies
An investor perception study, carried out on your behalf by a third party, and in which the participants are able to remain anonymous, is an effective way to gain insight into how they perceive your company.
This helps inform your strategy and adjust your messaging so that you are talking to the pain points and requirements of your target investors. It also shows that you are committed to serving both retail and institutional investors and that you do not take them for granted.
Euronext Corporate Services’ Post-Listing Advisory provides an investor perception study, led by experts, that utilises a proven methodology and a targeted approach to understanding how shareholders view your business. You receive an in-depth analytical report, filled with insights drawn from statistical data, and qualitative feedback analysis, combined with an action plan based on the findings.
Analyse market performance
The way that your stock price fluctuates can also provide clarity on how the market views your offering. Obviously, steady growth or retraction tells its own story, but you should also be alert to significant jumps, which tell you that something has shifted within the market perception of the issuer.
Trading volumes are another metric that helps you understand how individual investors view the value of your stock. When more investors buy into your business, you can ascertain that you are doing something on which they look favourably.
Analyse earnings calls
Analysing the recordings of earnings calls can provide some insight into how the stock market has reacted to the issuer’s financial results. By looking at the transcripts and picking out the words that investors, analysts and journalists use, it is possible to glean detail on what they consider the consequences of the results to be.
For example, if the word risk is used a lot in relation to certain aspects of the company’s operation or strategy, it could seem like they are unsure of the issuer’s ability to manage the challenges that it will face.
Earning call analysis can also be as basic as understanding whether the audience felt there was more good news than bad news and, therefore, their overall sentiment towards the business.
Review analyst reports
Analyst reports can influence investor sentiment, as they are written specifically to guide shareholders over the value of a particular investment. Those investors undecided on your stock will often wait to see what the analyst says before committing to a trade.
This makes it important to read the reports and understand what they are saying in order to work out how investors will react to them. It also allows the IRO to take steps to mitigate the effect of a negative analyst report or to capitalise on a positive review.
Analysing reports on your peers is also important to put into context the sentiment of investors towards the sector. Consider whether the outlooks align and what it means if they do not.
Be proactive about investor relations
One certain way to find out what investors think is to get your executives and IR team in front of them and let them converse directly. Whether you run in-person events or online IR sessions, having that opportunity for investors to set out their perceptions on the table is valuable to both parties.
It could be roadshows, conferences or private meetings with key investors, but however you wish to engage, make sure you reach out to shareholders and actively seek their views and comments.
This helps you judge how the market views your efforts and allows you to lay out how you will address their concerns. It is an opportunity to show that you value their input and can allay fears, improving investor sentiment.
Monitor press and social media platforms
As much as IROs wish that investors would come to them in the first instance if they have any problems or doubts about the issuer, it is not always the case. This is why it is essential for IR officers to monitor social channels used particularly by retail investors. You can learn key information about how these shareholders view both your stock and that of your peers. Monitoring is also important for preempting activist behaviour.
You should also keep an eye on the industry and investment press for stories about your company or sector. The coverage can affect how investors feel towards your stock, so seeing the stories early gives you the chance to take action, if necessary.
FAQ
What are common market sentiment indicators?
Common market sentiment indicators include:
- ‘Bullish’ per cent index: This measures the number of stocks with ‘bullish’ patterns compared to the total number in an index.
- Advance/decline line: This measures the number of advancing stocks minus the number of declining stocks. It can indicate the breadth of a market movement, with a rising line suggesting positive sentiment.
- High-low index: This tracks stocks hitting a new 52-week high and those hitting a 52-week low, providing a new high percentage. A rising high-low index can suggest positive sentiment.
Can investor sentiment influence the fundamental value of a company?
While investor sentiment can influence the market price of a company’s securities, it doesn’t change the company’s intrinsic or fundamental value, which is based on tangible factors like assets, earnings and dividends.
However, extreme sentiment trends from seemingly irrational investors can lead to market prices that significantly deviate from what is expected.
How can an issuer positively influence investor sentiment?
Issuers can positively influence investor sentiment through consistent and transparent communication, positive financial performance, sound corporate governance and effective management of investor expectations.
Timely disclosures of material information, regular investor relations activities and strong leadership can all contribute to positive investor sentiment.
What is a put-call ratio?
The put-call ratio is a popular tool used to gauge the overall sentiment of the market. It is essentially the volume of put options (the right to sell an asset) divided by the volume of call options (the right to buy an asset) traded in a given period.
A high ratio indicates a negative sentiment as more investors are buying puts rather than calls, whereas a low ratio suggests a positive sentiment.
How frequently should an issuer assess investor sentiment?
The frequency of assessing investor sentiment can depend on several factors, including market conditions, the issuer’s specific circumstances and the nature of the investors.
However, a regular assessment – such as quarterly or semi-annually – can provide valuable insights for decision-making and strategy development. During periods of market volatility or significant company changes, more frequent assessments might be beneficial.
ConclusionThe value of a company is based on a wide range of factors and investor sentiment is one of those that does have a bearing on the price of an issuer’s financial products. This is why it is essential for investor relations teams to understand how the market views their stock and that of their sector. By gauging investor sentiment, you can adjust your strategy and outreach efforts accordingly. If the sentiment is positive, it could be the right time to engage shareholders and encourage investment. If it is negative, you can ensure you communicate your case to investors, showing why the company will surpass their expectations. If you want to learn more about investor sentiment for your company, Euronext Corporate Services’ Post Listing Advisory can help. It provides investor perception studies for issuers, with an in-depth analysis of the findings and a tailored action plan for businesses to move forward effectively. Request a demo for your company today. |
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