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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.

Remember, if in the right stock, at the right price,
the market direction will mean little!

I'm J.R. Budke and this is my opinion!

J.R. Budke
Stocks in the Spotlight



The 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 company. If you need assistance in equity strategy, or consulting, please contact us at the above telephone or e-mail address.

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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.