Clientele Effect – Definition

Cite this article as:"Clientele Effect – Definition," in The Business Professor, updated February 22, 2020, last accessed July 11, 2020, https://thebusinessprofessor.com/lesson/clientele-effect-definition/.

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Clientele Effect Definition

The clientele effect stems from the idea that the kind of investors that are attracted to a security or investment as well as their goals for the investment determine the price movement of such security. The clientele effect explains how changes in policies and market situations affect the price of a security. According to this effect, the demand for investment or security and the goals of investors cause a change in price.

The clientele effect also thrives on the assumption that certain investors are drawn to the stock of a company because of the company’s policy and when there is a change in policy, the investors adjust their holdings causing price changes.

A Little More on What is the Clientele Effect

To best explain the clientele effect, one must consider how changes in policies and circumstances alter the interest of investors in a particular security. When investors make upward or downward adjustments of their holdings in a company, it will create changes in the price of the stock.

Also, the Lifespan of security or public equities plays a major role in the clientele effect. For instance, public equities have the following categories; blue-chip stocks, dividend-paying securities, high-growth stocks, and mature stocks. Each category has a varying lifecycle that indicates how much of return the investor should expect. While some stocks naturally exhibit upward movement in price as the company grows, prices of other stocks can be affected by changes in the policies of the company.

Two Sides of the Clientele Effect

The clientele effect plays out in two dimensions which are;

The first is how investors are attracted to certain categories of stock and security and given their level of demand for such stock and their goals, changes in offices might occur. The growth of business also serves as an attraction for specific investors, especially those in constant search of businesses with good growth level, when this occurs, a change in price is likely to happen.

The second dimension of the clientele effect rests on how changes in company policies affect the interest of investors in the stock of a company, thereby making an adjustment in their holdings that can affect prices of stock.

While the first dimension indicates high-growth investors who chase after high-growth potential stocks, the second dimension of the clientele effect shows dividend-seeking income investors.

Real World Example

This illustration will help your understanding on the clientele effect;

Company XYZ has investors who purchased its stock because they are seeking high dividend payouts. If there is a regression in the growth of the company which creates a decrease in dividends payouts, many of the investors will adjust their holdings in the company by either reducing the number of stock they hold or selling their positions in order to invest in another company that pays high returns.

Reference for “Clientele Effect

https://www.investopedia.com › Investing › Investing Strategy

https://en.wikipedia.org/wiki/Clientele_effect

https://www.money-zine.com/definitions/investing-dictionary/clientele-effect/

https://financial-dictionary.thefreedictionary.com/clientele+effect

www.investorwords.com/7057/clientele_effect.html

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