One of the first
signs of a bad investment is when we discover the management team
allowed the shares outstanding to increase beyond a manageable amount.
This happens because so many companies become public without enough of the funds needed for the company to
do business. They find an old public company doing nothing, buy-out the
existing insiders, do a big reverse to say good bye to the previous
shareholders and start trading.
Since these new companies
have no money the management team will do a
private placement to raise money. This part is fine, as long as the
price paid is near the high end of the old range and they don't sell
too many shares, but most companies in this situation go ahead and
raise money without any consideration for the dilution at low prices.
the company has some bucks
and should now be able to move forward on the business plan.
What happens next is most run out of money, because they didn't raise
enough, because of the low price of the Private Placement and now they
will need to do another
private placement and more dilution.
What happens now is the stock falls to a new low because of the
constant dilution at lower than market prices The problem now is
the stock is
probably down too far, because the company has done little, and
they have to sell many more shares then before in order to
raise the same amount of dollars.
This action becomes a
habit and before
we know it the company is trading at a few pennies with more than 100
million shares outstanding, because there were so many private
placements all low prices.
Also, the "new" management team fail to support the stock, right from
beginning. Without marketing the stock is destined to fall.
am very serious about this and it is the downfall for many
start-up public companies. Like all businesses, marketing does not
happen, it is planned, but it seems like the average new public company
has either never learned this important lesson, or just forget about it.
have seen this happen so many times, and for so many years now,
that even I am getting a better handle on it. It truly is a hard lesson
to teach and learn, simply because valuable (limited) dollars seem to
find other things that at the time seem more important.
is the catch. Other things may seem more important, but the common
stock in a public company is the very most important asset it has, and
if a management team can learn this the road to success will be much
easier to travel.
Its all about "supply & demand"
Float is the total number of shares trading. It does not include
insider stock. Remember this because it is the main item in how a stock
trades. The stock market was designed as a "supply & demand" business.
The fewer the shares, the more the company is worth per share, the more
it cost to become a shareholder, or another way of saying it is , the
higher the price on the shares. The
opposite of this is, of course, the more the shares the lower the price
of the stock.
called "Market Maker's"
(another word would be Wholesaler's) and
it is there job to make a market in the stock by offering a bid price
for the sellers and an offer price for the buyers. If there are more
buyers in the stock the makers will raise the price they are willing to
"sell to us". If there are more sellers they will lower the price
they are willing to "buy from us".
makes the prices the Market Maker's
set has to do "entirely" with "supply & demand". A well known company, such as Apple Computer, or
Microsoft, has so many shareholders the supply usually equals the
demand, give or take some movement in the stock over time and this
makes the market maker's job much easier .
market maker makes money on
buying shares at a lower price than they sold (shorted) them to us. A quote
of 0.50 X 0.53 would mean if the makers sold 1000 shares at
0.53 ($530.00) and bought 1000 shares at 0.50 ($500.00) they
made 0.03 ($30.00) profit. This trade may only take a few seconds and
the maker is now "covered".
is a key word and it is the whole ball of wax. When the maker sells us
stock, s/he does not have it, therefore, they give it to us anyway in
hopes of buying it back lower. This is called "shorting", because they sold
stock they didn't have. They must buy it back, someday, since they already sold it. Once they do
buy the stock back they have "covered"
the short position.
comes the problem. If a stock is trading at a dollar and the market
maker shorts 100,000 shares, s/he is at risk for 100,000 dollars. Odds
are the maker won't short that much so as to limit the risk. If the
stock moved up to $1.10 on the bid the maker stands a chance to lose
$10,000 because it would cost 1.10 per share to cover the 100,000
at what happens if the stock is trading at 0.02 X 0.03. If the maker
sells us 100,000 shares at 0.03, s/he is at risk for only $3,000. If
s/he shorts a million shares the risk is only $30,000 and if they
buy it back at 0.02 they make a cool 10 grand. Not bad!
The lesson to be learned.
If there are so many shares trading, and the price of the stock is
under a dime, the market makers do not worry about shorting a million
or more. Since the demand is supplied with stock that does not
exist (short) the maker's will keep shorting until the demand dies off,
which in turn creates the selling. If there are more than 100 million
shares out there the market makers will will always find sellers.
the demand is covered with a can of air, once the demand falls off the
stock drops fast and the market makers make a bunch of money. Keep in mind,
There may be as many as 10 or more makers, meaning the ability to short
ten million shares is almost the norm, guaranteeing the stock price
will stay about the same until the demand dries up.
simply the supply of stock that is unlimited when there are
more than 100 million shares outstanding in a low priced stock.
The demand is usually limited when the supply is not, and it has little
to do with what the company does.
this is not too confusing. The main point is avoid stocks with too much
"possible" supply at too low of a price where Market Makers are not afraid to short millions of shares.
- VALUE - PRODUCT -
in the right stock, at the right price,
the market direction will mean little!
I'm JR Budke and this is my opinion!
Stocks in the Spotlight
Stocks in the Spotlight is not an Investor Relations or Public
Relations firm, but a stock market related web site with opinions and
recommendations. It also has to do with equity strategy, with a desire
to assist in the various methods of increasing the value in a public
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please contact us at the above telephone or E-mail address.
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.