A stock promoter is an individual or organization that helps raise money for some type of investment activity. Stock promoters may raise money for a company by offering investment vehicles other than traditional stocks and bonds, such as limited partnerships and direct investment activities. Often, promoters are paid in company stock or a percentage of the capital raised.
Stock promoters are individuals or organizations responsible for raising capital for a client company through various marketing strategies. They are primarily hired during pre-IPO (initial public offering) stages with the task of creating market awareness about a company, thereby encouraging investors to obtain respective equity securities.
Promoters play a significant role in the success of a start-up organization and are usually paid in terms of equity shares of respective holding companies in proportion with the total capital raised. Apart from market strategies implemented to incentivize investment in a particular company, holdings of a stock promoter also influence the total trade volume of its equity shares in both primary and secondary markets.
Types of Promoter
Depending upon the nature of an issuing company/authoritative body, stock promoters can be classified into the following categories –
Penny promoter
One of the most popular types of promoters, such individuals/company is in charge of creating awareness regarding a start-up business among residents. Such promotion can cater to both resident and non-resident individuals, depending upon the requirements and guidelines pre-set by issuing companies.
Penny stocks are often considered as a dubious form of investment, as no adequate knowledge regarding the issuing companies and services provided are available to individuals. In India, all stocks trading below Rs. 10 can be labeled as penny stocks. Such securities are highly speculative as no public information is available, and they often have large bid-ask spreads and consequently, a lower trading volume.
In such circumstances, shares held by a promoter incite confidence among investors regarding the future performance of such start-up companies, thereby promoting the sale of such penny stocks, respectively. Investing in such stocks of companies demonstrating the massive potential for growth and having a strong foundation can lead to significant capital gains through asset appreciation in the long run, as the prices of respective shares can rise manifold.
However, in some instances, a penny stock promoter can also use misleading information about the actual valuation and metrics of a company, causing investors to incur huge losses. To avoid such situations, investors should conduct thorough research regarding the intrinsic valuation and management of a company to gauge its true growth potential in the prevailing market scenario instead of relying completely on stock promoter alerts.
Promoter specializing in government securities
Debt tools issued by the central government and the RBI are initially traded through auctions and subsequently resold in the secondary market. A promoter often purchases a substantial chunk of such securities and trades it over the counter in major stock exchanges to facilitate investment in government securities by retail individuals not having a Subsidiary General Ledger (SLR) or Current Account (CA) with the RBI.
Institutional promoter
Gradually, over time, all equity shareholders act as institutional promoters of a company as they advise their friends/relatives over purchasing corresponding stocks. Such a promoter increases a company’s market reputation without imposing any financial strain, and can only be developed based on past performance. High annual turnover and sales, timely declaration of profits and dividend pay-outs, etc. can create an institutional promoter, inducing huge trade purchase volume, which, in turn, drives up the market prices of such shares (through higher demand) in the market.
What does low promoter holding mean?
While at first glance a low promoter holding is generally considered negative, a lot of other factors needs to be considered before you completely ditch that stock. A stock that has low promoter holding but very high DII and FII holding is a good sign.
A stock with low but increasing promoter holding is also considered good. If you want to dig deeper then try to understand the reason behind low promoter holding. Sometimes you might find the next multibagger in these stocks.
How to find promoter holding
Promoter holding for listed companies is available on the website of BSE and NSE. An investor can enter the name of the company in the search boxes available on the exchanges’ websites and select the company from the cascade list that appears.
After the company page is displayed, investors should search for ‘shareholding pattern’ from where they can get period shareholding patterns for the available shares of the company.
One thing that investors should assess is how much of the holding is pledged. A promoter may have a significant holding and may have maintained his shares over several quarters. But if he has pledged some or all of his holding with lenders in order to raise loans, it may indicate pressure on the company’s finances.
Also, in case the price of the company’s shares falls and the promoter is unable to make up for the decline, the lender may sell his shares in the open market, which will reduce his control over the company.
Examples of promoter holding
Examples of high promoter holding
Examples of low promoter holding