Wall Street works on many levels, but these five are the most important for CFOs of publicly-held companies.

1. Portfolio managers. Typically, those men and women that determine the purchase and sale of stocks for mutual funds and other institutions.

2. Research analysts.

3. Retail stockbrokers.

4. Individual investors.

5. Sharks.

PORTFOLIO MANAGERS
These individuals are faced with daunting problem of investing many millions of dollars that flow into their funds every day. They compete with all other fund managers to buy promising stocks early in their growth cycle to maximize their fund’s performance over others. They basically use computer models to determine whether a given stock’s validated financial performance and the nature of its business fit into one of their funds.

If they do, and all other of their proprietary criteria check out, that stock will inevitably end up in their portfolio.

One of their many important criteria is the amount of your stock that can be readily purchased without driving its price sky high. If your stock is tightly held and the float is modest, your will likely never be selected for inclusion in any large mutual fund. The risk of getting “locked in” is too great, and the portfolio manager’s inability to acquire an appreciable amount of stock makes the potential reward not worth the risk.

Further, if your stock is already owned by many institutions, they will dispose of your stock at the first sign of trouble — each trying to sell before the competing institutions know what’s happening. In this scenario, friendships count for very little. Their job is performance. It’s nothing personal; just business.

RESEARCH ANALYSTS
These are basically financial reporters. They work for portfolio managers; they also work for brokerage firms. They write “research reports” on stocks that their employers or clients have an interest in. Sometimes these reports are distributed to the general investing pubic, sometimes not. Their stock in trade is keeping extremely current on certain stocks and industries and providing this information to select interested parties. Their employers want to know whether yesterday’s analysis is still current, and preferably whether your company is going to (pick one) fall short, meet, or exceed the quarterly financial expectations they arbitrarily place on your company.

Like everyone else, they are quite busy. Their problem is information overload. Regardless, they are always on the lookout for something new and different. And here is where your annual report can make a difference.

If you have a story to tell, you tell it well, and what you say fits their needs, you will have piqued their interest. If your report also includes a large amount of industry data, it will get a serious read—if for no other reason than you have done some of their homework for them. Never overlook the fact that they are sometimes on deadlines, and that just maybe your report meets their needs (“overlooked situation,” “turnaround stock,” “new revolutionary product,” etc.). This may result in an institutional report, or a retail research report, or maybe just a passing recommendation to a group of retail brokers. Whatever, you ’ve set the ball in motion.

RETAIL STOCKBROKERS
These are the men and women in the trenches. They have an insatiable thirst for new stock ideas. And almost all will tell you they believe they are the last on the totem pole to get information from their firm. While never proven or substantiated, the pervasive rumor on Wall Street is that the really good research is first given to institutional investors. Maybe so; maybe not. But if someone (read portfolio manager) is capable of buying a hundred thousand shares, one might just be tempted to make this information available to that person before providing it to someone who might buy a hundred shares. After all, it ’s difficult to make two simultaneous phone calls.

Regardless, retail stockbrokers are an invaluable source for stock support, which is rarely ever tapped! Remember stockbrokers hunger for ideas, and they like to appear “in the know” about stocks of local interest. Consequently, we urge our clients to cultivate local brokers and, at a very minimum, distribute their annual reports to every brokerage office in their area.

This is extremely effective and low-cost approach to investor relations, particularly for smaller companies with a limited amount of stock outstanding. Here’s why.

If you have a limited amount of stock in public hands, the large, national brokerage firms will not “sponsor” your stock by putting it on its recommended list or by writing a research report. The reason is simple. If they were to write a research report on your company and distribute it to their 500-1,000 brokers, there would not be enough stock outstanding to absorb the sudden buying interest. That concentrated buying power would disrupt the market. And that’s a definite “no no” with the SEC.

But, if you work with the local office of a large, national brokerage firm, there is no problem. And, under normal circumstances, the national headquarters encourages its brokers and resident managers to acquaint themselves with local companies. They can become a valuable source of reliable information on that company, particularly whenever that stock exhibits unusual trading activity or becomes a source for merger and/or acquisitions.

In a nutshell, take the managers of your local brokers out to lunch occasionally. Keep them up to date on your company and it will pay dividends, often in unexpected ways.

A stockbroker’s greatest fear is to be accused of giving advice that results in a loss for his customer. Brokers know this is the fastest way to lose a customer. It’s not the actual loss so much as it is that the broker recommended the stock. So to avoid being criticized, he will make stock recommendations in an oblique manner.

Typically he will call his client and tell him about an “interesting” company he has just come across. And rather than “pitch” the stock directly, he will send the annual report to his customer and let the customer make up his own mind. In short, the broker uses your annual report as his sales literature. That way the customer won’t blame him if the stock fails to perform, and the broker has an excellent chance to earn a commission on the purchase of that stock – even two commissions if the customer has to sell a stock to raise funds to make the new purchase.

But stockbrokers don’t have all the time in the world to read annual reports. Your report has to grab his attention. And there are several time-tested ways to do this.

INDIVIDUAL INVESTORS
Your best source to reach individual investors is through the National Association of Investors Corporation (NAIC). Its membership is approximately 730,000 individual investors. The NAIC sponsors regional investor forums and holds a convention annually where publicly-held companies have the opportunity to extol their investment merits. For information, contact the NAIC at www.better-investing.org.

Your current shareholders are yet another source. They frequently exchange investment “tips” with other investors. Often they will show your annual report to their friends. This is one more reason why it pays to have a well-written, easy to understand annual report.

SHARKS
These are security analysts that express an interest in your company. You are delighted and cooperate fully with their requests. They will interview your senior officers, tour your facilities and then leave, telling you they have to “run your numbers” before coming to any decision about your company. You assume they may write a research report on your company. Maybe so. Maybe that was their original intent. But perhaps you gave them some proprietary information that might cause them to view your company as a takeover candidate, friendly or otherwise. And you may wonder whether the individuals who interviewed you and your officers may later switch jobs and join a firm that specializes in mergers and acquisitions. Consequently, it’s wise to proceed carefully and slowly in these situations.