Introduction

Initial Public Offerings (IPOs) have become one of the most eagerly awaited events in the financial world these days. When a company offers its shares to the public for the first time, it is known as an IPO. A primary factor that ensures an IPO's success is active and significant public participation. The simplest and most common technique employed by companies to ensure their new IPO is a success and they have obtained the needed capital is hiring promoters.

In this article, you will learn who promoters are, what they do, their types, and some common criticisms.

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Meaning of Stock Promoters

Individuals or organisations who help companies raise the needed capital by promoting their shares on the stock market via different marketing strategies are known as promoters. Companies usually hire promoters before the new IPO to create a buzz about their stock on the market and create general awareness. Their responsibility is to ensure that they get as many equity investors as possible to purchase the company's stocks. They do this by conducting seminars, advertising, social media marketing, etc. If they boost the share's visibility, it becomes more attractive to the investors.

In turn, the increased share prices ensure the upcoming IPO is a success. In lieu of their services, they are given a portion of the company's equities as per the capital raised. The stock volume of a company traded on the stock exchanges is also influenced by a promoter's holdings.

Types of Stock Promoters

Depending on the kind of financial investments they promote, there are three types of promoters in the share market.

• Institutional Promoters

They are existing shareholders who promote the shares they have invested in by sharing information about them with their circles. They undertake extensive research before investing and then recommend the same to others. Such promoters indirectly promote a company's stocks.

• Penny Promoters

Such promoters usually deal with low-priced or penny stocks trading under ₹10 per share. Penny stocks are known to be volatile and a risky investment. However, if the promoter has a significant holding of penny stocks, it increases investor confidence in the company.

• Government Securities Promoters

Some promoters specialise in promoting government-issued securities such as bonds and debt instruments. They acquire government securities from auctions and sell them across stock exchanges to increase public participation.

• ​​​​​​​​​​​​Common Criticisms of  Stock Promoters

As mentioned, stock promoters play a vital role in promoting and marketing a company's shares. They are in a position of power that allows them to influence the price and volume of stocks traded solely based on their holding in a company. A befitting phrase that perfectly captures the role of stock promoters is "With great power comes great responsibility." After all, they can sway investors and influence a company's stock volume and price.

As useful as a promoter is, they are also criticised for a commonly used tactic known as pump and dump. In this, promoters invest in a high-value stake in the company's capital. This looks like a viable investment to investors even if its performance and financials are not strong. Why do they do this? Promoters in the stock market leverage their position to lure unsuspecting investors to buy stocks based on their holdings.

As the number of investors buying the stock increases, it creates a corresponding demand that inflates the share price. Once the stock reaches its target price, promoters dump their shares immediately, triggering a wave of panic selling. This crashes the stock prices.

Therefore, before you invest, it is important to examine not just the promoter's holdings but also the company's different fundamentals.

Conclusion

Stock promoters play a vital role in the stock market and shoulder the responsibility of promoting shares of a concerned company to raise capital. They also increase share demand through various marketing tactics and draw attention to certain stocks. As beneficial as the role might be, there are also some who manipulate the stock prices or use misleading tactics.

Before you invest, its important to understand why you choose certain stocks instead of solely relying on what the promoters say. Before investing, analyse the stocks according to your risk tolerance and investment goals to ensure they fit your portfolio well. Remember, in the end, it is each man for himself in the stock market.

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