Whom
Ever Gets
Out First Takes Home The Bacon
Spiking
is
the word that best describes the method of moving a stock price up
quickly, possibly for no other reason than promoting the stock. Spiking
a stock may have nothing to do with fundamentals as many of the
companies that use spiking have no fundamentals.
There
are two ways
to spike a stock, intentionally and unintentionally
Although both tend
to yield the same results it would be the intentional ones that are the
biggest problem because they're cheating you on purpose.
The Intentional
SPIKE: When
a company, probably with a zero net worth, needs money it offers shares
to a select group at a much lower price than the current market
(private placement). This way they have money to pay salaries &
expenses, but usually not much more as the shares are sold for a quite
low price. The dilution is normally millions of shares and, since they
were sold so cheap, it hurts "all" current shareholders, including
insiders.
Now
these select shareholders that own stock lower than anyone will want
out because the only reason they bought the Private Placement was to
make a bunch of money. Private Placement investors are normally never
loyal or long term.
Next the company, or a
third party, commence heavy advertising
and promotions designed to be packed into a few short weeks, for the
sole
purpose of moving the price of it's stock fast in order to allow recent
Private Placement Investors (PPI's) a way out of the stock. In
the USA, the PPI's have a holding period for the stock of 6 months, in
Canada, only 4 months.
What
happens now
is the stocks runs up because of all the hype and the insiders sell
their Private Placement shares for many times what they paid for them.
Of course once they
have sold all their shares no one wants to pay for more "hyped"
promotion, the hyped promotion is over and
because of this all new buyers have dried up. Without the new buyers
any selling whatsoever takes to stock down so fast you'd think it was
the Flash.
All the new investors
whom bought on this hyped up move, plus
all the old ones that were not able to get out, will be stuck until
the next Spike or possibly till the end of time. These investors have now become
enemies and will sell on any future opportunity.
Keep in mind the
private placement investors have purchased stock much lower than the
market price. It is almost impossible for them to do
anything other than double their money and it has nothing to do with
the quality of the company. In most cases these companies have nothing
but an idea.
The
end result is the company has a little bit of cash and a whole lot more
shares trading and at low prices. These new cheap share are called the
short market dream.
The
Un-intentional
SPIKE: When
a company hires an Investor Relations firm (IR) (normally for 6 months
to a year) to create exposure and hopefully move the stock price
higher. Although a strong IR firm can do a good job the end result will
be the same as the intentional spike if the IR firm is hired while the
stock is at the bottom.
The
problem with an IR firm is similar. Usually an IR firm has a set number
of members and they contact them all right off the bat, and usually the
biggest clients first, as they want them to make money so they will be
around for the next deal. The end result is the same. After about a
month they have reached their entire base and start going over he same
ones again. The buying drys up leaving no market for the sellers and
down the price goes. It is simply "up fast down fast" all over again.
In
the case of an IR firm a company should concentrate on moving the stock
price up first before turning the IR firm loose. It is important to
know that since IR firms do not give BUY recommendations the price of
the stock will not matter to the IR firm as their sole task is
exposure. They have nothing to lose.
Either way if a
company does anything to bring in investors, at the low price of the stock,
the market makers will short millions of shares, because at low prices
they can afford it. As the stock climbs and as soon as the buyers dry
up these market makers seem to disappear as the spread widens. All they
want is to buy back the shorts hopefully at the bottom again, therefore
the stock price tanks on very few shares traded.
Either intentional, or
unintentional, anytime a low priced stock moves up fast it will fall fast. This is because of
the missing support levels that are only created when a stock climbs
slowly.
Most
investors and company officers, along with most brokers, have little
understanding of the short market for penny stocks. There is a big
difference between shorting low-priced stocks and big board stocks.
Anyone can short big stocks but only market makers are able to short
penny stocks.
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. Odds are it will move before we have an
opportunity to pick up shares at the low. If lucky enough to get in
just make sure to get out.
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.
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 "every now and then" 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
as investors we have
to look at the real reason the stock is climbing. Volume is king. It
shows a management team that not only cares about the shareholder but
also has a good product/story/service. A stock with little consistent
volume shows a management team that either could care less about the
shareholders or they don't know any better.
Find
a nice low priced
stock, with steady volume and trending higher. This is where the big
returns come from. No steady volume, no BUY. The rule is always "up
fast, down fast. As always, it takes time to build a good market and
the smart leaders realize this.
Not
only does a penny stock company have to have a reason for us to want to
be a shareholder, but the stock also has to have a reason for us to
want to buy it. There are some low priced companies that are quality.
They have a good product and/or service. Find them and buy them.
