What is the 'Clientele Effect'

The clientele effect is a theory that explains how a company's stock price will move according to the demands and goals of investors in reaction to a tax, a dividend or another policy change. The clientele effect first assumes that specific investors are attracted to different company policies, and that when a company's policy changes, investors will adjust their stock holdings accordingly. As a result of this adjustment, the stock price will move up or down.

BREAKING DOWN 'Clientele Effect'

The best way to understand the clientele effect is to explain how the effect explains investors' reactions. Public equities are usually categorized in different ways, such as dividend-paying stocks, high-growth stocks, blue-chip stocks or mature stocks. Each categorization helps describes the lifecycle of a business, and therefore, the way in which its stock provides returns to investors. A high-growth stock, for example, won't pay a dividend, but it may have huge swings in price appreciation as the company grows. A dividend-paying stock, on the other hand, has smaller movements in capital gains but rewards investors with stable, quarterly dividends.

Two Sides of the Clientele Effect

The first side of the clientele effect describes the way in which certain investors – or clients – seek out stocks in a certain category. Some investors, like Warren Buffett, try to only invest in stocks with a high dividend, while other investors, such as technology investors, seek companies that are high-growth with the potential for high capital gains. So, the clientele effect first outlines the way in which the company's maturity and business operations initially attracts a certain type of investor.

The second side of the clientele effect describes how current investors react when there are changes to a company's policies and procedures. If, for example, a public technology stock pays no dividends and instead reinvests all of its profits back into the company, it first attracts a growth investor. Then, if it decides to stop reinvesting in its growth and instead pay a dividend, high-growth investors may exit their positions and instead seek other stocks with high-growth potential, while dividend-seeking income investors may now see the technology company as an attractive investment. This explains the second meaning of the clientele effect, which has an impact on the company's share price.

it is also important to consider a company that already pays a dividend and has attracted clientele whose investment goal is to obtain stock with a high dividend payout. If the company then decides to decrease its dividend, dividend investors may still sell their stock and move to another company that pays a higher dividend. As a result, the company's share price will decline.

RELATED TERMS
  1. Dividend Clientele

    A group of shareholders with a preference regarding how much ...
  2. Forward Dividend Yield

    A forward dividend yield is an estimation of a year's dividend ...
  3. Capital Dividend

    A capital dividend is a type of payment a firm makes to its investors ...
  4. Stock Dividend

    A stock dividend, also known as a scrip dividend, is a dividend ...
  5. Dividend Irrelevance Theory

    The dividend irrelevance theory is a theory stating that investors ...
  6. Dividend Frequency

    Dividend frequency is how often a dividend is paid by an individual ...
Related Articles
  1. Investing

    Put Dividends to Work in Your Portfolio

    Find out how a company can put its profits directly into your hands.
  2. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  3. Investing

    Best Places to Find High-Dividend Yield Stocks

    Learn about the advantages of stocks with good dividend yields, such as income, stocks in defensive sectors and strong-performing companies.
  4. Retirement

    Reinvesting Dividends Pays in the Long Run

    Find out why dividend reinvestment is one of the easiest ways to grow wealth, including how this tactic can increase your investment income over time.
  5. Investing

    The Power Of Dividend Growth

    Dividends may not seem exciting, but they can certainly be lucrative. Learn more here!
  6. Investing

    The Top 5 Dividend Paying Oil Stocks for 2016

    Discover the top five dividend-paying oil companies for 2016 and what factors contribute to their ability to continue dividend payments.
  7. Investing

    The 4 Best Indexes for Dividends

    Learn about some of the biggest dividend indexes in the marketplace and which niche of the dividend universe each of these indexes targets.
RELATED FAQS
  1. Why do some companies pay a dividend, while other companies do not?

    There are several reasons why a company might pass some of its earnings on to shareholders as dividends rather than reinvest ... Read Answer >>
  2. Can dividends be paid out monthly?

    Find out if stocks can pay dividends monthly, and learn about the types of companies most likely to do so and how monthly ... Read Answer >>
  3. Cash dividend or stock dividend: Which is better?

    The purpose of dividends is to return wealth back to the shareholders of a company. There are two main types of dividends: ... Read Answer >>
  4. Are dividends the best way to make money for retirement?

    Using dividends for retirement income can provide a hedge against a variety of risks, but investors need to be aware of the ... Read Answer >>
Hot Definitions
  1. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  2. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  3. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  4. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  5. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  6. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
Trading Center