Whom Ever Gets Out First Takes Home The Bacon
Spiking, is the process of a company starting heavy advertising and promotions designed to be packed in a few short weeks, for the sole purpose of moving the price of it's stock quickly in order to raise money. The idea is to cover investors so heavily that they jump in and buy the stock so the company can jump in and sell some.
There are many ways a company has of raising money when the stock climbs. Spiking is the idea of raising as much as possible quickly, because once the advertising and promotions stop the only way for the stock to go is down. Whomever gets out first takes home the bacon!
Spiking, is about the worst thing a company can do. It starts a process of future selling on almost any news. Investors that chase the stock and buy a few days after the move starts, end up watching their investment turn into a loss position shortly after buying. This is because it only takes 20% sellers to drive a stock down. If we don't want it, neither do the market makers.
Most companies never know the damage they are doing. Some sharp promoter comes in and tells them s/he/ they have the ability to raise funds quickly. The company never thinks about the damage it does to shareholders by using this process to catch them.
The next time the stock moves up again, if it ever does, the investors that bought high and got burned are quick to step up and get out on almost any upward gain.
Now what happens down the road, maybe 3 to 6 months after the first spike, the company does the same process again. This time the stock will not get anywhere near the level of the first spike, since they added many more sellers by screwing them in the first place. The company will not be able to raise as much money as before, and they will have to sell more shares the 2nd time around for fewer dollars, which means more dilution.
The process usually takes a stock down to the nickel level and it does not take long. Every move higher is met with more and more sellers. Why? Because they got screwed. The stock didn't move on an announcement of big profits, or a big sale, but usually on news of not much of anything.
We as investors have to look at the real reason the stock is climbing. If we can get in in the beginning stages of the "SPIKE". we can get out in about a week to ten days with a giant profit. Just make sure to get out.
I try to teach companies that they only way to move the stock up is to take 3 to 6 months to raise the money needed. By using a longer term advertising and promotion platform the stock will climb like a stairs, moving up a bit and allowing sellers to sell to the buyers and this keep the stock from falling.
Remember, it only takes 20% sellers to knock a stock down, therefore the sellers need to have a someone to sell to when they want to, not because the stock is falling off a cliff and no one can get out fast enough. If a company uses a longer term program, they will have a constant flow of new investors coming into the stock - over time - and allow the investors that wish too sell someone to sell it to, over time. This way the stock is able to climb, assuming it deserves to.
Spiking the stock in a company that virtually has nothing is the norm. These are the companies that need to move stock to pay the bills, simply because they have nothing. As investors, this is where we need to look the hardest. We do not want to confuse a quality company, one with a strong shot at a future, with a company that will need to stretch hard to get anywhere.
This is where reading about the company comes into play. It has to have a story that makes sense and many do not. When reading the story, ask if if makes sense. The story will always sound pretty good, but reading between the lines is where we can find the real story. As investors we want to discover the spike and avoid it. There is no way of knowing when it will turn back down, but when it does it will do so at a fast pace.
When following the trading habits of a low priced stock, one that we may have an interest in, we need to look at the volume over the last 3 to 6 months, or further if possible, but the last 3 to 6 months is the most important since it has to do with current events. We want to see steady volume as opposed to low volume that sometimes has a big day. If the stock is slowly climbing and the volume is steady, this is where we want to be. This holds true for a stock we may already own. A big jump in volume, accompanied by a big jump in price, is an invite to put on our Nike's and see how fast we can get out the door.
Spiking a stock leads to a low price on the stock and usually well over 100 million shares trading through dilution before the company finally goes belly-up. This can take a couple of years to fall all the way to a penny, and the investor that already owns the stock will never be able to make a cent, since all the new investors are buying so much lower.
The "bottom Line" is, if we can't get in before the spike, we don't want to get in at all. If we are already in a stock when the spike happens, don't start believing the company can turn sand into diamonds, but instead look for those Nike's.
Find a nice low priced
stock, with steady volume and trending higher. This is where the big
returns come from. As always, it takes time to build a good engine and
the smart leaders realize this.
I am J.R. Budke and this is my opinion!
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J.R. Budke had been a stock broker since 1981, an options principle since 1982 and a branch office manager since 1987. He is currently inactive as a stockbroker as of 12/31/99. J.R. writes the articles and opinions for the Stocks in the Spotlight, and the opinions and selections covered in this section are his opinions only, and no others, unless otherwise stated. You should not purchase any stocks solely on Mr. Budke's opinion. Mr. Budke's opinion should not be considered advice as it is only an opinion. Always consult with your broker or investment advisor before purchasing any stock.