How does one analyse small caps and AIM stocks (on London UK stock market exchange) or those fairly unknown companies trading on the Canadian stock market? I’m referring to London’s AIM market; the marketplace for small and medium size growth companies in the UK. Or those companies traded on the TSX Venture Exchange; the public venture capital marketplace in Canada for emerging companies. Needless to say both exchanges should come with a health warning since investing in juniors is high risk. Oilman Jim gives us his take on how to research small caps. Jim has been actively involved in the stock markets (UK & US) since the early 1980s from both sides of the fence.
If you do not know exactly what you are doing, it is not easy making money in the speculative small cap markets and often preconceptions can get in the way. There are many books on investing and trading, but hardly any that address the actual peculiarities of these markets. The few that do exist deal only with the North American markets, which operate in quite different ways to London. General stock market investment books are quite useless in this respect, since investment techniques suitable for main markets and large companies are not appropriate for AIM and small cap companies. Most of those that try to apply these techniques lose, often a lot. It is a completely different game.
Essentially, beyond technical descriptions of the market, basic explanations of what a public company is and outlines of how the market operates from the public perspective, there is not actually much useful information out there about trading AIM and small cap companies. Hence, I decided to write this. I shall be covering everything you will not read elsewhere, particularly subjects which others either do not understand or even know about, or even if they do, are unwilling to talk about openly, including shorting and the various forms of market abuse. I shall set out exactly how all this works in detail. Exactly how the insiders make their profits. And how you can profit too. I shall explain all the things that no one else will, all the secrets the insiders do not want you to know. A large amount of money can be made if you know how it all actually works and what goes on behind the scenes may be completely different to what you think. This material will be useful to all trading the AIM and small cap markets. I believe most will find it eye opening.
I have been involved in the markets for a long time. I bought my first shares in the 1970s and I have worked in the financial sector since the early 1980s. My particular knowledge is of the stock markets and I have been actively involved in these, both in the UK and the US, from both sides of the fence, for over 40 years. My focus is on the oil and gas industry, where I have significant experience, but I also understand fully how the game is played in all the other sectors, whether it is mining, pharmaceuticals, technology, or any other area. The modus operandi with all of them is just the same. I understand exactly what everyone is doing and precisely what their agendas are
The only way to succeed in these small cap stock markets is to understand and accept reality, and that is what I am going to set out and explain. I shall assume that readers know the basics such as what a share is, how to open a trading account, where to find share prices and company information, etc.
What is important to understand from the outset is that very few of these companies succeed. Many rotate through a series of different managements and projects, with their share prices declining year after year. Even the ones that do appear to “succeed” often do not do so from the perspective of longer-term shareholders, the value of whose investments constantly erode away with continual dilutive financings. While the very occasional one will actually deliver for shareholders, broadly these AIM and small cap companies should not be viewed as investments. Anyone with doubts about that just needs to review a few longer term price charts to see the endless declines.
What these type of shares are good for though is trading, since they can move very fast, often by multiples, in a short space of time. To succeed, it is necessary to understand why and when they do this, and how to avoid the numerous pitfalls and traps that can ruin people who get involved.
The first things to put to one side are fundamental and technical analysis. They are simply not applicable to small, speculative companies in continuous fundraising cycles. Of course, the company has to have an exciting project, that is essential and, yes, they all will have resource reports and/or financial projections, but that all is best taken with a pinch of salt. What is assumed in these is rarely delivered. Key if there is going to be short-term share price performance is a compelling, highly promotable story, with big headline numbers.
Technical analysis is equally inapplicable when large numbers of new shares are being issued into the market at new price points. Previous support and resistance levels lose any significance with the large scale dilution that takes place in these companies.
Those who see themselves as investors wanting to invest in great projects and profit thereby may question all this, but it does not matter how great the project is if the company is going to finance it with multiple placings at ever decreasing prices.
As perhaps is becoming clear, the key points in fact are financing and promotion and these are what this text is about.
Small cap speculative companies exist to enrich their insiders, not their public investors, and everything they do is for their own benefit, not yours. The vast majority lose with these companies, but for the scheme to work, some have to profit and you want to be one of those.
So let us go through the various stages when a “deal” is put together. Whether they are using a shell or floating a new public company, the operation is basically the same, although a shell is often easier since many of the necessary elements (compliant non-executive directors, NOMAD, brokers, solicitors and auditors) already are in place, although serial players will have a tried and tested (from their point of view) “team” of their own to use.
First, they need a project and I shall focus on oil and gas, although the principles are the same for all companies. It does not necessarily need to be a good project, the main requirement is large potential numbers. Failure generally is on the cards anyway. Best from a promotional point of view are projects that are drill ready.
There are two main options (other deal types will be discussed in relation to company structures and share issues later): acquire or farm-in to a permit or license, where all the preliminary work such as seismic is done and the next stage is drilling, or acquire an old oil field with possible undeveloped locations and deeper exploration potential. The latter is quite popular since such fields can often be acquired for very little; indeed, if there are decommissioning liabilities, they might even get paid to take them over. Often they are acquired by an offshore company and the public company does its deal with that, with the organisers effectively flipping the asset into the public company for a several million pounds upfront profit. It can also be done for no or little cash with the public company agreeing to do certain work and the organisers’ offshore company retaining a carried interest. Many deals are more sophisticated and the transaction is done in stages, but the principles are the same. Of course, some companies are genuine with real projects. Sadly, they do not necessarily always perform that well. There are a few stars every decade, but very few of the companies we will encounter are actually like these ones and commercial failure is the most likely option.
Remember, most projects are not economic and will never even cover the public company costs, let alone provide any return to shareholders. Indeed, many projects only exist because they are necessary for the CEO and/or organiser to hustle the money. First hard question: is the project even viable? Second easier question: who knows more, the experienced operator selling the asset, or the young corporate finance guy buying it with the money of the ill-informed? Reality is the good projects get acquired by the large companies; small companies rarely get their hands on them.
With a vehicle and a project, the organiser, whether the CEO or someone behind the scenes (as often is the case), will address financing and promotion. These are the two most important matters from our point of view and, with the advent of social media, they have started to merge together. As I said before, much of this is done in stages, but it is the main financing for which we need to watch.
The key is always to be heading for an event, fully financed. You do not want to be in at an earlier stage, with the main financing still to be done, or be in after the event, when the development finance will need to be done, but without the original excitement.
I am going to be addressing all of this and more in much greater detail, with clear explanations of how such knowledge can be applied for advantage. There are some truly dire companies that never offer any long-term profit opportunity, but many do for a certain period of time and that is what the “game” is all about. Yes, there is the very odd one that could make a good investment, but the vast majority do not, which is why most AIM and small cap investors’ portfolios show losses, often extremely large ones. It is about trading them over relatively short periods of time. That is where the money is made in this market.
Subjects I shall be covering include shorting and the various ways this is done, naked shorting and how it is guaranteed profit for some, forward selling, market abuse in its many forms, promotion including exactly how it works whether via traditional media, social media, IR/PR companies, brokers, bulletin boards, commentators, paid for opinion, interviews, web sites, messaging and emails, and financing, including placings, subscriptions, convertible financing and investor sharing agreements. I am not expecting you to do any of the dodgy stuff described, but it is important to know about it. I shall also be addressing ways of trading, including conventional and extended settlement and the use of CFDs and spread betting, plus their advantages and disadvantages. In addition, I shall be explaining how to see through these companies to understand what they really are and who is actually in charge (it is not always the CEO or the Board). I shall also be explaining who the “institutions” involved in the financings actually are (most are nothing like what the name implies), how many do not even have to put up any cash to profit, and much more. I believe there will be something for everyone to learn here.
I shall not be covering theory, rather how it all actually works in the real world, keeping it practical and realistic, so that everyone can use the information for their own advantage regardless of the level of their trading or investment.
What it is all about of course is identifying the right companies at the right time. Buying at the best point and selling or de-risking at the best time(s). That is the most important aspect of all and something I shall be covering in detail, since the whole point of this work is to be able to make money short-term in the AIM and small cap markets.
You need to know where the company is in its operational, financing and promotional cycle. Understanding that unlocks the door to market success, since by entering at the right point you will always be buying into upward moves. And this is the key.
Only go for what look like the certainties, even if that means fewer trades. Profits are worth nothing if they are wiped out by losses, the losses have to be eliminated. It is not just about the shares you buy, even more importantly it is about the shares you do not buy. Be selective, you do not have to be in everything. Isolate the trades that make profits and eliminate the loss making ones. Learn to ignore the marketing aimed at the less informed and focus on the points that actually are important.
You need to have conviction in your investment and trading decisions. Indeed, you must have that so you do not get shaken out of the position.
Sizing is vitally important. No position must be so large that it stops you sleeping at night and fear shakes you out. Since there is always a danger of a “black swan” event with these small companies, choose a position size where even if it goes to zero, you will not be too badly hurt.
Always de-risk as the price rises, or take profits completely. End up holding the position for free and ride it if you want, but remember that ultimately these companies’ business projects usually fail. Scale in and out of positions gradually and in stages.
Virtually all the AIM and small cap oil companies are loss making, many with heavy capital expenditures and generous salaries. Thus, most need cash constantly. Very few have assets which offer adequate security to a lender, so financing has to be equity based. Broadly, there are two ways to do this. First, sell shares directly to investors who believe the company is a good proposition and actually want to buy the stock, even if they intend to flip it at a profit. Second, finance through the market.
The first is a quite straightforward proposition. The company’s broker, or brokers, will contact investors on its list, or through others, and stock will be placed at a discount to the market price. These contacts are made on a confidential basis and until the placing is announced to the market, the investors are in possession of “inside information” which they are not meant to disclose or act upon. Obviously, they do and the market prices generally decline before placing announcements indicating this. In some cases, the information leaks widely and is even published leading to large price declines, which can require the placing price to be reset downwards. A good indication of the “quality” of the placing can be discerned from the level of the discount and the level of the leaks.
The shares issued in these placings are not necessarily paid for immediately. Settlement can be several weeks later when the shares are actually issued. During this time shares are often forward sold and this can be a time of intense promotion on social media as those looking to flip extol the attractions of the shares they want to sell to you. It is not necessarily guaranteed profit for those taking the placing or the would be flippers though, since the poorer quality companies can often rapidly go to a discount to the placing price. Some feel they have “joined the club” when they enter this circle and take placings, but in reality they are often just marks.
The second, financing through the market, is a far from straightforward proposition and there are three main ways in which it is done. First within this category is naked shorting, whereby a trader or “institution” (more on them later) sells shares they do not own and simply fails to deliver them. They then approach the company saying they want to invest a large amount and cover their short via a direct issuance of stock from the company at a discount. Their selling also will have forced the share price down already and a good profit can be made without actually laying out any cash. Clearly, a lot of this is done on a nod and a wink and they sell knowing that they will be able to cover later on. The share price is damaged, but the company gets the cash and the directors’ salaries get paid, which to them is the most important thing.
The second way within this second category is convertible loan notes. These represent loans made to the company, which are either repayable in cash, usually at a premium, or can be converted into shares at a discount. For cosmetic reasons, they generally have clauses prohibiting short selling by the holders, but these can be got around and are intended to be got around. The holder then simply sells shares short, which generally moves the price down, then converts the loan note into shares at a further discount to cover the short. It is virtually guaranteed profit for the loan note holder and often the only way that some companies can obtain finance.
The third way within this second category is investor sharing agreements. These are for the “institutions” that do not want to put up any cash at all and essentially are just a present by the directors to friends and associates. Under an investor sharing agreement, the company issues shares to the “investor” who sells them and then pays over a percentage of the share price to the company. It is money for nothing with zero risk for the “investor” who just sells shares they did not even have to pay for and keeps around 25% of the sale proceeds. They are only used by the very worst of companies.
Clearly, existing shareholders are greatly disadvantaged by all of the above financing methods and it is interesting to note that all these financing techniques were made illegal in the United States in 1933. No such protection exists in the UK.
Now, naked shorting also can be done on a large scale pre-placing in connection with a ramp. Indeed, it is much easier to sell large volumes on rising prices rather than falling ones. People buy a lot more when they see the share price going up. Vastly increased promotional activity often is an indication that a placing is on the way, otherwise why would someone pay for it? Trading long on this basis is highly risky, though, since the placing, often at a large discount could be announced any day.
Some pre-placing ramps are primarily to get the share price up, so the placing can be done at a higher level than present, but the key tell-tale is the promotional activity by the less than reputable (more on this in a short while).
It is quite easy to guess whether a placing is coming up simply by looking at the company’s accounts and working out when they are going to run out of cash. If you combine this with the monitoring of promotional activity, you will rarely be wrong with your placing forecasting.
Avoiding holding shares over a placing possibly is one of the most important keys to success with AIM and small cap companies, which is why understanding the promotional side is so important.
Companies with convertible loan notes outstanding are best avoided, since the share price is very much more than likely to decline. Companies with investor sharing agreements in place almost certainly should be avoided, since their share prices are virtually guaranteed to decline.
One mystery for many is that whereas some companies do have promise, others have little and people ask why do they keep these worthless, purposeless companies going. The answer is simple: salaries for directors, fees for brokers, lawyers and auditors, trading profits for insiders with the shares. It is a pure exercise in cynicism. But with abusive promotional and financing techniques, even these types of companies can be kept alive.
Not all are deliberately dishonest, many are simply run by incompetents with a tendency towards pomposity. They engage in failed project after failed project, yet will never accept that perhaps they do not really understand the business. They actually believe they are serious business people, despite racking up seven figure losses year after year after year, and genuinely believe they deserve six figure salaries, large expense accounts and pension plans. None of the professional advisers say any different, because as long as the CEO can keep fundraising, they can keep earning too. Fees is what it is all about. The greed of the City knows no bounds and they will happily enter into business relationships with people whom they would not be seen dead with outside of work. Do not be fooled by implied endorsements from what may appear to be respectable associations. The names are only there because they are being paid.
Why do people buy shares in these types of companies? Possibly because they are foolish, with little knowledge and believe the story that the company is currently promoting or, more often, simply because they think or have been told that the share price will go up. Indeed, that is basically how the AIM and small cap markets work. The majority of people simply do not care about any underlying “fundamentals,” their investment or trading decision is based solely on a belief that they can sell the shares at a profit later that day, week, month or year. And that is how these nonsensical companies keep going. Investing in them is simply a game of pass the parcel, but with the odds very much rigged against the investor.
In this situation, since the shareholders do not really care about what is going on, the directors can do whatever they want. Every so often there may be some shareholder activism, but generally very few investors turn up at company meetings, other than for free food and drinks, and hardly any vote. The asset for the insiders is not anything on the balance sheet, it is the public quote.
The reality is that with control of the board of a quoted public company, you can do anything you want. In the right hands, it is a licence to print money.
We are then back to the deal process outlined earlier, with the “asset” being a necessary nuisance to raise funds and promote. The reality is that virtually anything can be dressed up and, for a good fee, a professional will come up with a report endowing the asset with the necessary promise.
I mentioned earlier that there were acquisition deal types for the company other than paying cash. The consideration paid by the public company for the asset can, of course, be shares issued at a ground floor price. The identity of the counter party can readily be disguised through the use of an offshore company, itself with multiple shareholders who will each receive less than 3% of the public company’s enlarged capital. They can all in reality be the same person using entities with no recorded beneficial ownership, such as funds, foundations and companies with bearer shares. The offshore company owns the asset, the public company acquires the offshore company (something like an Isle of Man incorporated one can give it a more respectable look) and the public company shares are issued in consideration to the offshore company shareholder names, each of which will own less than 3%.
All that is needed to effect the above is cooperative professional advisors, since the purchase and sale agreement does not need to be publicly disclosed, since those undertaking such an exercise will of course ensure that the transaction will not be classed as a reverse takeover, where a prospectus or new admission document would be required.
Like some of the financing techniques I described previously, corporate abusers can not get away with such a transaction in the US in the same blatant manner, since the purchase and sale agreement would need to be exhibited to a regulatory filing and the nature of the shareholders would become apparent. In the UK, however, it is all fine, or at least it is not found out, or examined.
All these essentially free shares are going to be sold into the market, though, depressing the value of shares which the public will have paid for. It is important to understand these matters, to see why shares can trade so far below their notional issue prices. It is simply because insiders secretly were given very large numbers of shares for nothing. The asset acquired by the company in such a situation equally will be worth nothing, regardless of the professional endorsements and valuations that come with it.
At the same time, it would be wrong not to say that not all companies and directors are the same as those described above. The problem, though, is that many are, hence the need to be aware. At the end of the day, directors are in it for themselves and, notwithstanding what they may say, the interests of investors are very low down their list of priorities. Investors only get considered when they need money. They are not regarded as the legal owners of the business, rather just as a necessary evil. Only when directors need, or feel they will need them, will the investors interests be considered.
You have to look out for your own interests and understand that the key to a promising stock play is always to be heading for an event, fully financed. This is the point in time when most share price rises take place. As I said before, you do not want to be in at an earlier stage, with the main financing still to be done, or be in long after the event, when the development finance will have to be done, but without the original excitement. You never want to have to guess, rather to be certain.
The whole of the AIM and small cap game works only because of promotion. This is the most important ingredient and it is essential to understand this.
Historically, small caps were promoted by financial writers in the newspapers and tip sheets and by brokers either face-to-face with clients or in telephone conversations. The writers and brokers usually were informally compensated, often quid-pro-quo, and that tradition continues today, the only difference now being the participants. Financial writers and brokers are still actively promoting shares, but others now have equal if not greater importance.
The big change is that previously there was a certain quality filter on the information being communicated, since the writers and brokers would not have been employed without them having a certain level of knowledge. Now anyone can have an audience for their opinions, regardless of their ability. And how can someone with no knowledge themselves know the difference?
Most people now obtain their information from the Internet and a new world has opened up in which investors can interact. The earliest forms of electronic investor communication were the bulletin boards, of which the main ones in the UK are ADVFN and LSE. Now, if everything is in balance, they should display alternative views and provide investors with a reasonable perspective of other investors’ opinions. Unfortunately, dissenting, and often truthful, voices tend to be suppressed, either by being shouted down by other posters, perhaps just other accounts, or by being removed by the administrators or moderators due to complaints from those other posters and/or accounts. Sometimes, the companies being discussed are PR clients of the platform, in which case it is possible that the administrators and moderators are less than independent. Commentary on these boards essentially is worthless, but it does have a huge impact on many investors. Much is blatant PR often being posted by the company or those retained either directly or indirectly. A significant part of the information being posted is deliberately false or misleading and often there is little or no counter to that.
The bulletin boards have to a certain extent now been superseded by the social media platforms, of which the most important for shares is Twitter, although the boards do remain extremely popular. A similar situation to the bulletin boards does prevail on Twitter, with promoters trying to shout down or bully those posting opposing views, however, this is less effective, since on Twitter the administrators and moderators will not come to their rescue and take down the posts they do not like and/or ban the truthful posters.
In all these venues, the idea of the promoter(s) is to create interest and excitement, leading to buying by investors. Ideally, these investors once they have bought the shares will in turn promote the stock. Whenever the price falls, those touting it claim to be topping up and a club or team like feeling is encouraged amongst investors, particularly via groups, to discourage any selling. Messaging services such as Telegram also are used for this purpose. The most powerful emotion being exploited is FOMO (fear of missing out) and people succumb to this time and time again. Like the bulletin boards, the majority of the information posted by promoters on social media is false or misleading.
Another major source of information for investors to which they afford much credence is interviews. Unfortunately, since they invariably are paid for, virtually all of these are staged, with pre-agreed questions and the company reviewing and editing the interview prior to broadcast and distribution. The information contained in these interviews often is misleading. They also provide further material for the bulletin board and social media promoters to use, misinterpret or distort.
In similar vein, many of these types of companies also word RNS announcements in a way that can be deliberately misinterpreted by promoters. It is very important to read the whole RNS, word by work, looking for any ambiguities. If you can spot them, then you can readily see what the real story is. I shall give examples of these later.
Investor evenings, presentations and lunches also belong to the same category as interviews. They can build up a false trust between investors and directors, who for the main are essentially professional salesmen. Investors can feel privileged and often think they are privy to advance information as a result, but this is rarely the case.
Officially, public issuers use and directly engage IR companies and PR web sites, but the meaningful impacts on price and volume are achieved in other ways. These companies and web sites often interrelate to commentators, who profile themselves as independent and uncompensated, even though they are paid. They are self styled stock market experts who purport to provide informed opinion, although the only criteria for qualification as one of their stock selections is a cash payment. Nevertheless, they do have influence and reinforce their credibility between them by interviewing each other. I am sure you will be able to spot them.
Most powerful, although not much used in the UK, are large email blasts, which can create millions of dollars of volume a day for US micro cap stocks. British promoters generally can not bring themselves to stomach the several hundred thousand costs for an effective one, although this method has occasionally been used for Australian companies also traded in London.
Disclosure of compensation is one of the cardinal rules in the US and is rigorously enforced by the Securities and Exchange Commission. Their view is that it is important for investors to know whether the opinion is genuine or paid for, but in the UK it just does not seem to be an issue, or even that important.
On to the actuality of the situation, AIM and small cap companies mainly are promoted on the basis of mistruths. The companies do not actually lie in their regulatory (RNS) announcements, but they can write them in a way that allows people to mislead themselves, or leave ambiguity to allow for alternative, more positive, interpretations by promoters. It is rather sad when people believe these promoters and even convince themselves that what they are being told is true, and tragic for them when, as always happens, the truth eventually comes out and they lose their money.
Very simply, do not believe any of it and do not allow yourself to be persuaded of the merits of a company to the extent that you believe it is a long term hold. These companies are for buying and selling, not for holding beyond the short to medium term.
For our purposes, though, it is better to see strong and effective PR engaged. The poorer companies, which are the majority, often can not generate the necessary impact to ensure the required excitement and get the share price moving. The level of the people involved is a fair indication of the level of the promotional quality of the company’s management and project.
Incentives for the promoters usually are in the form of cash and often warrants. Normal payments to official IR and PR outfits will be made directly by the public companies, but cash and warrants for the unofficial, non-disclosed, PR will usually come from the party controlling the company, often working in tandem with one of the brokers.
As a side note, it is very much worth keeping an eye on promoters’ activities, since they can often flag up a forthcoming placing, which as detailed previously can usually be confirmed by a quick review of the company’s cash position. It is essential to avoid these.
So how do they go about it? There are two main audiences: those who believe in fundamentals and look for what they think are good investments; and those who are only interested in whether the price is going to go up, preferably in the shortest possible time scale.
Looking at the first group, they are easy to manipulate. The company can only publish facts, but the promoters can do “research” and since 99.9% of their audience is clueless regarding petroleum geology/mining geology/pharmaceutical research, etc., they can as good as make it up. One of the favourite techniques with oil projects is “closeology,” which essentially is used to “prove” the merits of the company’s acreage by its proximity to producing tracts, or other acreage owned by well known companies. There will be good reasons why the prospect being promoted has not been drilled or permitted/leased by other companies, but this inconvenient point is ignored.
It is important to understand that even within an oil field, some parts are productive and some are not. Oil and gas generally is contained in undulating sands of varying thickness. The geologist aims to map these with structure and isopach maps. These will show both the prospective and non-prospective areas. Prospective areas are leased or permitted by real oil companies, non-prospective areas are not. Therefore, it is quite easy for a charlatan to acquire a large land tract, surrounded by production or well known names – and equally easy for their promoters to “research” it and extrapolate estimated “production” or “reserve” numbers.
The next step often will be for the promoters to speculate on the possibility of a takeover by a major oil company and huge possible numbers for that will be touted. The company can cooperate with this by issuing meaningless statements that it is in discussion with other parties regarding the project (it could simply be for the supply of everyday services) and the promoters can twist these statements to fuel their take over theories. “Credibility” is added by other paid commentators and posters espousing and endorsing the idea.
It is important to understand that Government issued oil and gas licences and permits can cost very little to obtain, and in some cases they can actually be a liability due to work programme commitments. The process to obtain one is relatively easy and in many cases quite straightforward. The United States has the simplest process, where Government or State departments offer leases for sale by auction. Alaska is particularly popular, due to its large perceived hydrocarbon resources. The minimum bid there, which is sufficient to acquire many tracts, is $5 an acre.
Outside North America, it is generally necessary to submit a geological report and a work programme, however, extremely large tracts can be obtained for very little cash. There are a number of geologists who specialise in obtaining licences and permits and their fee to prepare an application can be as little as $5,000.
As outlined previously, these leases, licences or permits can be flipped into the public company at a price which then gives the asset a multi-million pound valuation on the books of the company. This often is the “fundamental” value upon which some investors are focussing.
Back to the promoters and the second main audience who are only interested in whether the price is going to go up, preferably in the shortest possible time, this is an even easier group to convince. All that is needed is repetition of a simple message from as many sources or accounts as possible. You will see groups regularly switch on and switch off with these types of posts like a machine. It can either be done by a number of paid posters or just by one individual with a number of accounts. The catalyst to creating buying then is simply placing a few buy trades to start the price moving up and the advertisement of that move via the paid posters. Once underway, it can be accelerated by interviews and paid commentators.
It is very easy for people to get lured into these momentum plays and, as always, FOMO (fear of missing out) is what has to be avoided. It is very important to resist these, since getting involved destroys trading discipline.
If you understand what these promoters are up to, it is easy to spot them and avoid getting involved. Yes, you could make some money on one or two of their trades, but overall you will lose, big time if you get hit with a placing, which is usually what happens. In any case, relying on these types for trading ideas is not the route to success, in fact quite the opposite.
One of the greatest problems faced by investors is caused by their own failure to read and/or understand the disclosure information available. Some act simply based on a tweet and, to many, their concept of “research” is to read some recent posts on the message boards. The most diligent might listen to the latest interview.
Hardly any read the actual RNS announcements and virtually none the admission document. Yet these are the key documents mandated by the authorities to be published for investor protection. The admission document (which the company must have available for download on its web site) can be several hundred pages long, but at the very least it is important to study the history of share and warrant issuances and understand the current situation with those.
The share prices of some companies never go anywhere, even with the most exciting news, and this can be due to large numbers of shares having been issued to associates at very low prices at an earlier stage. Buyers are often up against a wall of selling with some companies and a lot of investors just do not understand where it is coming from. Many do not even want to know.
There is often a reluctance by investors to confront facts. They know a side of the story that they like and they do not want to hear anything that contradicts their beliefs. This weakness contributes to huge losses. In reality, if something is not what you think it is, you want to be out of it. Unfortunately, most will not accept that they have made a mistake until it is too late and their money is lost. Pride is the enemy here.
The only way to succeed, of course, is to base decisions on facts, not fallacies which you would like to be true. Accepting reality is essential. Conviction can only be based upon your own assessment of the facts, not the thoughts and opinions of others. You have to look carefully at the company of interest and, at a minimum, see how many shares were issued at what prices, how many options and warrants are outstanding and again at what prices, what the cash position is and for how long that will cover the outgoings – plus what news is going to come along in the meantime. That assessment will immediately reappraise many companies for you and should always be done pre-purchase.
It is critical to always remember that many commentators and message board and/or social media posters have their own agendas and will deny the truth of points you may raise in public, particularly regarding sensitive subjects such as prices of share issuances, numbers of outstanding options and/or warrants and possibilities of upcoming placings. You have to be strong enough to believe in yourself and your own knowledge. The opinions of the more abusive ones in particular should be ignored completely. Them trying to shout you down really just proves your point and confirms your concerns.
Remember also, the “other side,” the directors and the promoters, are not playing on the same team as you. Investors are who they feed off. Your money is their living. Read the RNS announcements, the admission document and ignore the rest of it. Focus should be on share prices and how they are moving, not the comments of others. Do not allow yourself to be misled.
One of the tricks to look out for is the “premium placing,” used to suggest that the share price is too low and the company is so good that “institutions” are willing to pay a premium to the current share price. Obvious question here of course is why do they not just buy up all the “cheap” shares in the market below that price?
Let us look at what is really going on here and the admission document should guide you. If you have a party or parties with a large holding issued at a low price, it actually makes sense for them to use some of the sale proceeds to take a premium placing to attribute a value to the remaining stock, which can then be easily touted and sold on the basis that private investors can now get in at a better price than the “institutions.” It is cynical, but that is what they do and it works for them. Realistically, why would an institution want to pay more, when it could buy in the market for less, or undoubtedly insist the company places at a discount. It is really only a connected party who would want to do that.
One is confronted with numerous deceptions, all designed to make investors think that the shares really are more valuable than the price prevailing in the market. In addition to “premium placings,” you see the same technique being applied with options issued well above the current market price (more on this later), directors exercising warrants above the current market price and, of course, ambitious, often wholly unrealistic and unachievable price targets being set, particularly by brokers.
Generally, brokers’ price targets are worthless. It is rare indeed that one is ever reached. Essentially, they produce their “analysis” and “research reports” with price targets either as a service to an existing client, to attract a new client, or simply for payment. However, these targets can and do impress and seduce the inexperienced. Even those who can see through the social media promoters, often are gulled by the brokers, to whom they afford an undeserved credibility and respect.
Similar reports also are produced by self styled “independent” commentators for payment. Analysts and research houses further produce reports – with price targets – for a fee. Regardless of the source, these reports add credibility to the promoters’ arguments and are used to deceive many. They are invariably best ignored.
It is important to put the quality, and hence value, of these projects into perspective. To do that, it is helpful to understand how the oil business (which is being used here by way of example) actually works in the real world and how genuine projects are created. That starts with geology. Knowledge in this area is always advancing and expanding, and each new development provides further information, which in turn leads to new prospects being generated by geologists. These geologists are either employed directly by oil companies, or work freelance and sell their intellectual property on a prospect by prospect basis to oil companies.
At this stage, the land is neither leased, licensed nor permitted, and there is no “asset” as such to sell. Generally, it is the smaller companies that take the project on at this stage. The larger companies will have their own full time geologists employed, plus professionals to deal with the land work, but these projects will never enter the small company world.
Having reached an agreement with the geologist, the next step will, in North America, be to lease the prospect acreage and, elsewhere, to licence or permit the land from the relevant Government or State. As outlined previously, it is not a particularly difficult process to licence or permit tracts, although it can take some time.
Some of these small companies doing this are public companies themselves and they will be leasing, licensing or permitting these prospects with a view to farming them out and/or using them as an asset to justify additional fundraising. Others are private companies, looking to obtain the hydrocarbon exploration rights purely to farm out. Essentially, two types of prospects get permitted: ones that can be farmed out to majors, which is usually the objective; and ones that can not. The latter is the stock of the lower quality AIM and small cap companies, who are not able to generate their own and/or are looking for a deal ready to go.
There are a number of reasons majors or the larger oil companies do not want to get involved in some projects, the main ones of which are: they do not view the level of exploration risk as acceptable, they do not view the prospective resources as sufficient, they do not view the project as commercial, and/or they do not like the environmental issues involved. If the prospect is decent, though, they take them, usually reimbursing the back costs plus a little extra, leaving the farmer (the company farming out the permit) with a carried interest, in respect of which the farmee (the company taking the farm-out) pays all the costs through either the seismic phase, through the first (or sometimes second) drill, or even through to first oil, depending on how well the farmer can negotiate.
Few of these projects ever actually make it to production. From the point of view of the major, they are essentially just paying option money to acquire them, which is worth it to take the project under control for a few years. Sometimes they do nothing at all; sometimes they shoot seismic, which has the additional benefit of building up their knowledge of the regional geology; sometimes they will drill an exploration well. But not that many go on to be commercially developed. In the grand scheme of things for the large oil companies, it is all worth it to find the occasional elephant field.
The prospects that go to other companies are essentially the ones that the majors and other large oil companies, who actually know what they are doing, have rejected, either initially, or through the life of the permit (think about how many times you see an exploration or appraisal project being promoted where they are talking about a well being drilled on the acreage by a major years ago). But what trickles down to the average AIM or small cap company is rarely the best and is of a quality that often only really can be funded by a large number of less informed investors chucking in a few hundred or thousand pounds each, essentially as a bet.
Even in the situation where an AIM or small cap company farms out to a major, the project rarely goes the distance and the relatively small amount of money they receive upfront often barely covers a few months of the directors’ salaries. The credibility of the involvement of a major is great for raising further money from investors though.
So, in reality, what the brokers, analysts, research houses and “independent” commentators are ever really talking about, even in the very best case with these companies and their projects, is something that only ever has the remotest chance of ever making a profit for the company’s shareholders. Their investment thesis relies on perfect outcomes, without consideration of the reality of the the oil game. It is important to think about this and understand the implications.
Also remember that even when it does all work out and the project proceeds to the production stage, the development finance can end up having to be arranged on terms that result in a loss even for those shareholders who took the initial exploration risk.
You really have to see these companies as being purely for trading in the shorter term, and they can be very good for that, but never as investments for a long-term hold. The projects can be beguiling, but never allow yourself to be seduced by them.
Back to the subject of structural trickery, like the premium placing mentioned earlier, the importance of directors buys also should be discounted. Look carefully at the amount of money they are investing compared to the amount of money they are taking out of the company each year and the number of shares they already own. Rather than signalling confidence, smaller purchases indicate the opposite, since they are clearly contrived and being done solely for promotional purposes.
Awarding themselves options priced well above the current market price is an equally deceptive and misleading practice. In reality, it indicates nothing at all. It is important to view all these devices as spoofs and discount them. Most people are convinced by these things, that is why those running the companies do it; do not be one of those who are persuaded by these tricks.
Many things in the AIM and small cap markets are not what they seem or appear to be. “Institutions” are one of those. When people hear this term, they think of something solid, like a bank, but on AIM the unnamed ones are actually quite different. Imagine more a name on a board outside a dodgy lawyers’ or accountants’ office somewhere on an island or in a smaller state, which makes its money by charging registration and incorporation fees and turning a regulatory blind eye to any inconvenient matters.
The traditional locations are familiar: Jersey, Guernsey, Isle of Man, Luxembourg, Switzerland, Lichtenstein and most former overseas possessions. Regulatory pressures have curbed many of their activities now and new locations have been established in places such as Dubai and Singapore. It does not matter that much though. AIM “institutions” rarely publish their address and, in reality, of course, they are just controlled by someone back in the UK, with the directors of the “institution” being nominees.
Even with institutions you may have heard of, it is important to understand that funds can be compartmentalised. Which means that someone can have a fund within a fund that accounts separately. Essentially, they can be used to avoid or evade regulation, reporting and tax. Important to understand from the investor’s point of view is that the name is not necessarily an actual endorsement of the investment by the named institution. As with most things AIM, little of it actually means what it seems.
It is easy to set up an “institution” if you want to. Many legal and accountancy firms in the various tax havens offer such services. You can even get them licensed too for an even more respectable look. If the name is not being disclosed to the public, then it is really just a question of what the NOMAD (nominated advisor) will live with. Perhaps a foundation or trust, or a nicely named company with bearer shares will be acceptable, none of which need necessarily cost more than a few thousand (or even just a few hundred) pounds to set up.
“Institutions” feature large in AIM, particularly the usually much higher prices they have paid for shares in certain companies. But think about this for a minute. Are the managers really so stupid that they constantly invest in hopeless, worthless shares? No, they are just a conduit to put the necessary money into the company to keep it going, with the added bonus of what appears to be a seal of “institutional” approval. As mentioned before, those “institutional” purchases at higher levels also can be used as a promotional tool to persuade the public that they are getting a “bargain” – and allow the “institution” to sell large quantities of previously acquired, lower price stock.
As mentioned before, these “institutions” also are used for naked shorting, where shares that are neither owned or borrowed are sold into the market, not delivered and then the unnamed “institution” takes a placing directly from the company to cover the short. This is a virtual licence to print money and, on “a nod and a wink” basis from the company, there is simply no risk. Just sell and sell, push the price down and then cover via an “institutional placing” from the company at an even further discounted price. You see this time and time again with certain “do nothing” companies, the necessary volume to sell into being generated by the usual promotional teams.
Some institutions are of course genuine, but in many situations it is difficult to see why they are investing, particularly with companies and managements that continuously lose their shareholders’ funds. It is a murky area, though, with much “quid pro quo” compensation. Always remember that corruption in the City is prevalent.
Equally murky can be the actual management of these companies. The person really in charge often operates behind the scenes, although if they are presentable and without a criminal record they may go upfront as CEO or another board director so that they can openly represent the company. If they are barred as a director, then they have no choice but to remain behind the scenes. Generally, these people are charming, but dangerous. There is no shortage of outwardly respectable people, however, who are happy to take their money.
The professionals involved (who are selected on that basis) also are happy to take their instructions from the shadow director as long as their well padded invoices are being paid. To get an idea of just how padded these fees can be, does it really cost £500,000 to £1,000,000 a year to run a do little or nothing company?
Many companies do indeed have nothing: just a letter of intent or memorandum of understanding, all kept alive by the hurdles deliberately placed in the way to delay completion and keep the story going. This business is about one thing: selling shares to private investors. Never, ever lose sight of this. It is key.
What the money is being spent on is what the controller knows is essential – names: credible looking directors, reputable sounding accountants, brokers and lawyers. The asset comes second. They all know that even with an asset, the underlying fundamentals remain junk. That is not a problem if you just want to buy and sell shares in these companies short term, but it is extremely dangerous to your wealth if you decide to hold.
In the US, most investors know these types of companies are really frauds; in the UK, most think these scams are genuine. First reason is the deference and respect incorrectly awarded to professionals associated with the companies. Again, just look at how the promoters play on such associations.
In reality, though, all that having big name accountants and lawyers proves is that the company can afford their fees. Again, any outwardly respectable non-executive directors are on the board for fees and expenses, nothing else. Providing they are not formally put on official notice of the questionable activities and parties involved, it is fine with them. Hear no evil, see no evil, speak no evil. Just like the three wise monkeys, whose figurines you will see in the offices of many professional advisors in the UK.
Always remember, people generally do not want to hear the facts, indeed, many get upset by them. Those involved with the disreputable small public companies do not want to know either. Try writing a letter of complaint to one of these companies’ auditors or solicitors if you want to check that out. You will receive a very stuffy response, if indeed any at all.
The second reason most people think these companies are genuine, and the most important reason perhaps, is the fact that they are listed/quoted on the London Stock Exchange. That to many is the imprimatur of solidity, respectability, seriousness and quality.
This problem does not arise in the same way in the United States, since these types of companies get nowhere near legitimate trading venues such as the NYSE and NASDAQ. They trade instead on the OTC (over the counter) markets, also known as the Pink Sheets. It is very clear which category they are in.
You can see how important this is by the way that listing/quotation on the London Stock Exchange is highlighted on these companies’ websites. However, no listing department has ever opined on the merits of these companies. Any review of a prospectus is purely to ensure that disclosure complies with legal requirements. The only arbiter is the NOMAD, who is retained and paid by the company. When one sees what they allow, clearly there are no real standards imposed at all, either on the projects or the people involved. The only test is whether their fees can be paid. They allow serial losers (from the point of view of the shareholders that is, since these individuals actually profit hugely) to take the helm at company after company after company, wiping out shareholder value time after time after time. And it keeps working for them. Somehow to investors, this time always is going to be different.
Back to the business of these companies and I shall continue with oil company examples, a deal type that is worth understanding further is the farm-out to the public company. These are quite common – and invariably bad for investors. Usually what happens here is a public company farms-in to an existing oil field on the basis that it pays a percentage (usually 100%) of the cost of working over or drilling a well(s) in return for a lower percentage interest (usually 50%) in that well and sometimes the associated land tract, occasionally the whole field.
The reason the owner of the field does this is simple: the economics of doing the work do not stack up. The public company does not really care about that, because it gets a deal to report and a flow of further announcements. Nothing they do is ever going to make any money anyway. Usually, the owner of the field or one of their contractors will do the work and the involvement of the public company will be limited to sending money. Amusingly, this zero actual involvement is often dressed up by the public company with an “exploration director,” or other similar title, being appointed, if they do not have one already, who on top of their salary will just waste further money by travelling, never less than by business class with stays in 4 and 5 star hotels, to visit the field and “discuss” operations.
Work overs and infill drilling usually see “success” (sometimes even with decent looking initial production numbers), but the economics simply are not there and the well will never recover its cost. That does not matter for the field owner though, who is on a free ride for half of the production and probably has made a profit already out of the money sent by the public company for the operations.
Reality eventually dawns in the company’s accounts one day, but by then, they have already moved on to the next project, with the farm-in forgotten. That paid for content for RNS announcements, that is it and it is all they ever wanted. The deal has simply been used as an excuse to raise money. Everyone at the company will have made money, as will all the professional advisors involved. Some investors will have made money from trading the shares. Those investors who may have believed in the project and held have lost their money. That is the way it works unfortunately.
One of the most difficult things sometimes is doing nothing, yet doing nothing sometimes is the best thing to do. People often want to be in every trade, but to win it is important to learn to trade only when everything is in your favour.
I know how hard this is, but you have to consider the overall end result. Unless you can eliminate losses, they eat your profits. It can be difficult to resist trading, but if you eliminate those middle ground trades and only go for the certainties, the outcome will be a greater number of profits than losses, and a better end result.
You probably even know in your gut when you make some of these trades whether they are good ones or perhaps questionable ones. It is all about control. Just do the ones you feel 100% confident about. You will find that it works.
Of course, none of it is meant to be like what I describe. It is meant to be an orderly market of serious companies with genuine projects making full and complete disclosure of all material information to investors. That is not the case and the only way the charade can carry on is by what is called “market abuse.” In the old days, this would simply have been known as “fraud.”
Many participants potentially can be involved: first are the company directors themselves when they interact via RNS announcements, presentations, interviews, investor lunches or evenings, and make direct contact with investors. These people are regarded by the majority of investors as the most credible sources of information, thus they are capable of doing the most harm. The character of the type of person who decides to set up a small public company aimed at speculative, sometimes desperate, investors is not always the best, so I would treat any information from these types of companies with a degree of caution, in the worst cases assuming it to be false, unless established otherwise. Even the more honest ones can have a tendency to exaggeration and wishful thinking, so again, even though people can think they are receiving possibly privileged information “direct from the horse’s mouth” it is wise to be cautious about what they say and try to verify it from genuinely independent third party sources.
Outside of the directors, brokers usually have the greatest financial interest, plus the ability and necessary contacts to enable market abuse. They can do this either themselves, through the publication of analysis and reports which exaggerate the opportunity and ignore or play down the pitfalls, the setting of overly optimistic price targets based on their defective analysis and their promotion of the company along with their misinformation regarding it to clients both existing and new, either face to face or on the telephone, and/or through the use of promoter contacts. Again, think about what type of person exactly would choose to represent some of these companies and/or their control parties. They are unlikely to be an altruistic type with their clients’ best interests at heart. Information from brokers is best taken with a large pinch of salt.
Some promoters are retained directly by the company and payment to them is disclosed. These are usually operators of investment orientated websites, who will profile the client company’s information and organise interviews with the directors and CEO. This all will be further disseminated on social media, linking back to the site containing further information. They will try to present the company in the most positive manner possible, but that of course is just what they do and are paid for. Surprisingly, though, many investors do not realise that these commercial looking sites are in fact businesses and believe that they represent a source of independent information, with their owners providing this content and undertaking the work for selfless reasons, because, like them, they are fans of the profiled companies. This situation often arises since these type of investors only know about and buy the shares that are being actively promoted by these sites and other retained and compensated promoters. They never even think to read the sections and pages of the website entitled “terms of service” or “disclaimer.” Nevertheless, these sites are what they are. The straightforward ones do not purport to be independent; even the less straightforward ones explain what they are doing in their small print and disclose that they have paid relationships with the companies featured on the site.
Many promoters are retained either by the companies or their brokers, or through other intermediaries or third parties, and their compensation is not disclosed. Some of these also operate web sites, less professional looking usually, without full disclaimers, providing interview facilities, often conducted in a more informal, less commercially apparent, manner. They deny the receipt of any compensation, even when questioned directly about it, presenting themselves as “independent,” which of course they are not. Just that constitutes market abuse by itself right from the outset, without even considering what further misrepresentations they may make, of which there will be many. Often they will falsely claim to be buying the shares themselves and adding even more if, more likely when, the price falls. Essentially what they are engaged in is deception, but they do not care and adopt a general “holier than thou” attitude, tut tutting at the activities of other companies which are not their clients. These types generally appear and start to swing into action before placings to help move up the share price of the client company and increase liquidity in the market to help and facilitate naked shorting by parties close to the company, which will then be covered at a substantial profit in the upcoming financing.
A few of these promoters even claim to be buying so many shares that they are having to file TR-1 forms disclosing initial holdings of over 3% and increases or decreases in their holding thereafter. Note, though, that there are no checks on the accuracy of these filings. If a company receives one of these forms, it has to announce the contents of it. Anyone can file anything, regardless of whether it is true and no action in respect of these filings ever appears to be taken.
Some promoters are not paid and are not retained by the companies either. They simply choose a company they think has a good story, and most importantly a tight market, acquire a line of stock and promote it with the aim of moving the share price up, selling and making a profit. In the United States, it is known as “scalping” and is an offence. It probably is too in the United Kingdom, since saying “buy” when you are in fact selling most likely is market abuse. Nevertheless, many investors appear to think that this is “the game” and they play along enthusiastically. I am not sure that those outside the inner circle necessarily understand that they are likely to be left “holding the baby” and usually they are just creating additional volume for others to sell into. With the advent of social media, everyone can be a promoter if they want to and some who see the angle take advantage of that.
Bulletin boards and social media, in particular Twitter, are the homes of the latter two types of promoters, who will use multiple accounts for maximum effect. Generally, they specialise in the misinterpretation of presentations and RNS announcements and, using multiple identities, create an atmosphere of excitement around the companies they are promoting. If the story from the company as it stands is not strong enough and it can not be made sufficiently powerful through a misrepresentation of the existing material, then the promoters generally will just lie and say whatever needs to be said. Whether it is due to the selling of shares in anticipation of a placing or the selling of shares bought specifically to be flipped, the buyers generally, perhaps rather invariably, are being deceived by the posts made by these promoters. Many traders of course do not mind, they just see it as the way the modern market operates and are happy to repeat the lies themselves if it suits them.
Interviews have become a major promotional tool, with investors affording much credibility to them. What most do not realise is that unlike the type of interviews they are used to on television, AIM and small cap companies pay these “interviewers” to “interview” them. They are stage managed, with questions agreed in advance and the company has the right to edit the interview afterwards. Many misleading statements are made by directors in these interviews and, since they are paid, the interviewer does not correct them. With both a dishonest director and a dishonest interviewer, these productions can turn out to be prime examples of market abuse. There will never be any actual new material in them (that can only be released in a RNS) and they should be viewed only as marketing.
RNS announcements generally are truthful, if not necessarily telling the full truth. The NOMAD (Nominated Advisor) has to review them, which makes someone else in addition to the company responsible too . Unfortunately, not all NOMADs are as reputable or respectable as some might think and will happily collude with the companies to agree wording that, while notionally the truth, will in fact be misleading to novice investors, those unfamiliar with the ways of the market and promotion, and those not fully informed about the ways and methods of operation of the company’s industry. You see the impact of this all the time on the bulletin boards and social media when people discuss RNS announcements, thinking they mean, or deliberately interpreting them to mean, something other than what they actually say.
Misinterpretation of RNS announcements by promoters is one of the main areas of market abuse. Very few novice investors read them and even those who do rarely fully understand them, often reading into them what they themselves would like the situation to be, rather than what it actually is. Many investors are their own worst enemy, since very few people are able to accept that they were wrong. This of course makes the work of the dishonest companies and promoters really quite easy.
Some social media promoters go further and concoct their own stories, often involving invented or speculated upon takeover bids or major contracts. If there is no actual material out there in the public domain upon which to base a fictitious story, then many promoters will just fabricate it, posting whatever they have thought up as false material on a fake news site. Serious investors of course see through it quite easily, but those who want to believe it do. Sometimes the company is involved too and provides RNS announcements which can be misinterpreted to suit. An example is a contract entered into in the normal course of business with a household name, which transacts with all on the same basis, first being announced by the company, then massaged by the promoters into an implied endorsement of that company by the household name, or even an indication of a takeover interest.
Many like to trade these plays, which if done “right” can be hugely profitable, going on for some time, even rising to unanticipated heights, and they do not care if the story is false. They will still be happy to retweet and share the fake news if it suits the position they hold. Investors are delighted to hear the news and rumours, even if they are fake, and again will redistribute and even defend them against those who are calling them out as false. Even when everyone else has sold out and the price has collapsed, many still hold on to hope, trying to preserve the dreams of riches which enticed them in the first case. In comparison, the initiators of the false story have profited, often significantly, and moved on. Again, it is accepted by many as just part of the way things are these days.
Bulletin boards deserve a special mention, since so many people use them as their sources of information. The principle of these is fine, providing there actually is balance, with both sides of the argument allowed to express themselves. Unfortunately, it appears that certain parties are able to get posts which they do not like removed. This is done either by filing multiple complaints with the administration who do not really examine them or assess the merits, and indeed can be done just by one party using multiple accounts, or on instructions by the companies and promoters who pay for additional facilities on these sites. It is extremely murky and highly abusive. Few realise that the moderation is, in fact, biased.
Financial writers also can be included here. As detailed before, many accept payment, directly and indirectly, and are not necessarily independent in the way that people believe. Depending on the audience of the publication, some can have a significant impact.
IR companies play an important part too. Their essential service is to provide a contact point for investor enquiries, a service which appeals to those directors and CEOs who are nervous of direct contact and communication with their investors without a protective moderator present in a controlled environment. It is always a good test to see how much a company hides behind them. Many do.
The previous part covered the subject of false or misleading statements being made by various parties in the course of certain activities which constitute market abuse; the other side of that is manipulation of prices and volume in the marketplace to give a false indication of interest and demand. The impression of buying activity in the market is a key element to catalyse people to invest.
It is important to understand from the outset that the very initial opening price of the shares of most companies is essentially arbitrary, unless they actually are obtaining genuine funds from genuine institutions on an arm’s length basis, which is not always the case, particularly considering the outcome of most of these companies’ projects, the concomitant effects on the companies’ share prices and the need for those institutions investing funds obtained from the public to actually obtain a return if they want to stay in business.
What makes things work for promoters is that most people generally believe that stock market prices are genuine, a result of efficient markets accurately reflecting the value of the company. Authorities (e.g. courts and tax offices) accept these prices as absolute for the purposes of valuation at a point in time. What they do not understand (or prefer not to know, since it would just make everything too complicated) is that at the bottom end of the markets, these prices can easily be rigged.
The opening market price is essentially what those in charge at the company want it to be and in situations where there still is little stock in the market the price can be moved virtually anywhere they want it to be at very little cost. The objective of any stock promotion of course is to sell shares, therefore buyers need to be enticed in. Statements by promoters are not always enough, though, potential investors invariably also want to see market activity and action in the share price. They want and need to know that other investors are buying.
The main way the impression of active, and often substantial, trade activity in the shares is achieved is via “wash trades,” essentially matching sales and purchases which are put through the market by the same party in order to create volume. These will be disguised by breaking down the transactions into unequal parts to create the impression of genuine buying and selling. Multiple parties, which can of course all be the same person behind the scenes, also are used to make it appear that there actually are changes taking place in beneficial ownership. Using offshore entities and initiating the orders through financial institutions and brokers located abroad makes it difficult, if not virtually impossible, for a regulator to prove.
With little genuine volume in a market, the share price can be moved up or down with small amounts of actual buying or selling. Flurries of buys can be created to give the impression of immediate investor interest and the price can be continuously moved up to draw in those worried that they might miss out. The necessary patterns even can be created on the charts if necessary to lure in those who invest based upon technical analysis. Not only is the story at the company often a lie, the action in the market often is too. With these smaller companies, caution is the watchword in all respects.
At the lower levels, the same methods are used by those in certain social media groups to create market activity to catalyse buying in their own promotions. Not only should the words being used to promote these companies not be believed, neither should the market activity in their shares. Every single morning, large numbers of investors are lured into buying shares in these types of promoted companies. Virtually all are out of pocket by the end of the day.
There are large numbers of new marks arriving in the market every day for the promoters to exploit, since the retail base is much broader now with a vastly expanding investor audience. The principal reason for that is technological change and the ease of opening an online trading account. Many providers now offer a smooth and fast “on boarding” process simply via an app. As a scan of the message boards will show, most, in fact virtually all, of these new investors are utterly clueless. They may know a little about the theoretical basics, but nothing about the way it actually works in real life. This is the prime audience for promoters now. These newcomers have read about the success of others and think it is easy. Now they feel privileged to be receiving information from what they believe is a top tipster or social media “influencer,” whose endorsement and praise actually mainly comes from their other social media accounts – and often ironically their victims.
The reality is that the promoters can say anything and their audience will believe them. These new investors generally do not undertake any research of any nature, other than reading the social media comments of like minded individuals who reinforce their own points of view. They buy only because they think the share price will go up. They have no interest in anything other than that. The details do not matter to them.
Of course, the sheep get shorn, but they still come back time and time again (this time is always different they think) even sometimes defending the promoters who caused their losses. It is a quite remarkable situation and the few who do wake up are quickly and readily replaced by further, equally gullible newcomers.
Even market collapses do not shake out their numbers, such is the power of greed and peoples’ belief, and desire, that riches may be just around the corner.
There is an important psychological aspect in that stock market activity is not perceived as gambling, but rather as investment. Very few would believe that wealth actually could be gained through betting, but most do believe it can be gained by buying shares. Stock market investment also has an aura of respectability, which is lacking from speculative alternatives such as Forex or Crypto. The sad truth, though, is that in respect of AIM and small cap shares, the average newcomer probably would have more chance of success in an amusement arcade.
Returning to the subject of price manipulation, like analysing and researching non-existent fundamentals, it is also best to beware technical analysis of something that often is artificial too. Regarding volume, large numbers can be created simply from the rollover of trades, where settlement is extended for a further period of time in return for paying the market maker a small spread. Always watch out for this, since it can hugely distort totals for what otherwise would have been low, or no volume days. There actually is often very little genuine volume in many of these companies’ shares.
The other side of the coin here is that a lot of trading now is not going through the traditional markets. Companies offering CFDs (contracts for differences) and spread betting are becoming more and more popular. Much of their exposure is hedged in the actual markets, but with the increased interest in shorting, CFD and spread betting providers take advantage of the fact that their customers’ differing views can often provide a natural hedge. Thus there may actually be more interest in a company’s shares than indicated by volume in the actual market, but not necessarily all translating into net buying (hedging in the market by the CFD and spread betting providers), which is what is required if the share price is to move up.
Furthermore, since the majority of customers lose, it is relatively safe for the CFD and spread betting providers to operate as “bucket shops” in the classical sense of the term, where the customer orders are not actually sent to the market (just thrown into the bucket) and the house takes all the risk.
The main attraction to investors of the CFD and spread betting providers is that they offer leverage. The big disadvantage is that they trade using the published spreads, which for AIM and small cap companies often can be substantial, sometimes 10%, or even more. Trades through traditional brokers which are actually routed to the market are executed with spreads which are very significantly less.
Leverage of course also can be obtained via traditional brokers simply through the use of extended settlement. This will depend upon the broker’s view of the client’s financial strength to absorb the potential loss if necessary and the attitude of the compliance department. Such trades also can be rolled over to extend settlement even further, although some brokers impose limits on this.
Gains/profits from spread betting also are tax free. Obversely, spread betting losses cannot be offset against capital gains. The thinking behind this is that more people lose money than make it from gambling, therefore, it is better for the Exchequer to leave punters’ winnings or losses outside the taxation system.
Moving back to fundamentals, as I have questioned before, how much does the truth actually matter in any of this. If the company can put together a credible, compelling story which investors believe, and that story is capable of moving the share price significantly higher, does it really matter how good the company’s underlying reality is if one is only trading it short term?
First, most people, in fact the vast majority, are not going to know whether the story is true or false. They are going to be driven by their perception of it and that is what will determine whether or not they buy and in turn, subject to whatever selling there is, whether or not the share price will rise. That caveat regarding selling is one of the reasons why I said previously that it is essential to know what selling there may be and at what price.
Second, virtually all these projects will eventually fail from a commercial perspective, so whether or not the initial premise is true is often irrelevant to any long-term investment consideration, since they are never going to get there anyway. If one was investing only on the basis of a final outcome, there would be very few companies indeed to buy in these AIM and small cap markets.
The story being true does have additional strength, though, since it opens up buying and endorsement from those with more knowledge than the average investor, plus the possibility of a farm-out of the asset. It reduces, but does not totally eliminate, the risk of short-term involvement, and while a partnership or farm-out with a known company is no guarantee of success, it certainly adds credibility and helps bring in yet more buying again.
The thing is though that since it is all promotion based and that really is the most important element of share price performance, a strong, believable story probably is more important than the actual fundamentals, which at the best of companies, upon deeper examination, rarely are that strong.
It may sound cynical, but in reality the whole AIM and small cap business is. To succeed in these markets, investors and traders have to be so too.
One subject which is rarely heard discussed is audience. Yet it is one of the most important aspects in ensuring a strong promotion and explains why those in charge at these companies can prefer to use a shell with an existing shareholder base for new deals. With an actual IPO, the audience has to be built from scratch. With a shell, thousands of shareholders and an instant audience is already in place.
There is an old saying that an investment is a trade gone wrong. People do not like taking losses and often hold until the bitter end hoping things will come right again. Stock once bought tends to stick and, even better from an organiser’s point of view, many investors tend to make the mistake of averaging down their losing investments. And what better time to average down from the existing shareholders’ point of view than when a company returns to the market with what looks like an exciting new deal.
For a strong promotion, the old shareholders will not really be enough, though, and when it comes to obtaining future shareholders what matters most is the advertising and marketing spend, plus the perceived attraction and excitement of the new deal. There are numerous possibilities for these, each with their own advantages, or otherwise.
Let us look at some examples in the oil and gas sector (the following deal types are not exhaustive, but provide a reasonable overview):
Weakest are the “transactions” which in fact are only letters of intent, memorandums of understanding or conditional sale and purchase agreements, i.e. non-binding and often just aspirational. Of course, these are the easiest types of “transactions” to do and can be done with little or no cash. Indeed, all it requires is for the party on the other side to say they have something. It does not necessarily mean that they do. Nevertheless, a skilled promoter can spin such a story, indeed some can even achieve considerable success with this, and it can all be dragged out and hyped as each “milestone” is reached, but as these things go it does not really have that much underlying strength. And, at the end of the day, of course, even if the deal does happen, it is inevitably still going to need to be financed.
This is the killer from the investor or trader’s point of view, because even if such a proposition does graduate to a more tangible level and an acquisition actually is completed, at what level will the financing take place and will it be straight equity or convertible debt. The deal being financed really should be a pre-condition of any investment or trade. I have stressed the importance of the company being fully funded several times already and it is rarely a good idea to invest before this stage.
Moving on to actual deals, the company generally will either be buying a project where it will act as the operator, or farming-in to an existing project with a third-party operator, sometimes by buying an existing participation. Transactions in the first category often can go wrong, since no matter how much the company’s management may fancy their abilities, in real life they may well turn out not to be up to it and this is frequently the case. There are many examples of abject failure by AIM and small cap companies who have tried themselves to act as an operating entity. The risk of their projects is bad enough without the addition of their own management incompetence. Much better if all that is left to actual professionals who know what they are doing.
Deals in the second category, particularly if there is an experienced and reputable operator, especially a major, involved are much safer. If the numbers are good then this type of transaction can often be the best from the point of view of the effectiveness of the promotion and subsequent share price performance. Important is the potential future news flow (some are likely to issue more announcements than others) and the promotional ability of the team involved. Some projects also can capture the imagination more than others and a further factor often can be how well it all can be presented.
Sometimes the project will have been generated by the company itself, who then will either farm-out a percentage to cover costs and/or raise the necessary finance. Again, focus really has to be on the anticipated news flow and the quality and strength of the promotion. Ironically, it often works out better for short-term shareholders if the public company being promoted is the one farming in, rather than the one farming out, even though the economics would suggest the opposite. Regardless, as I discuss below, it is always best to wait until there is a fully financed drill.
Deal types then break down into various categories, some of which are better than others. Worst is something in the nature of a farm-in to work over existing wells, with the public company taking a share of any increased production. As mentioned before, the main reason the other party enters into such a deal is that the operation is not really economic. There is no big money in such a project anyway and, even if there was an operating surplus, which is unlikely, it would never get anywhere close to covering a public company’s overheads. These are deals for those who really just can not find anything better, but do have the advantage of not requiring too much cash. One does see them promoted, but not often that successfully.
Moving up the scale, but only slightly, would be a farm-in to drill new wells (infill) on existing producing, or abandoned previously producing acreage. While the counter party will be entering into such an agreement since they are not too impressed with the economics and do not wish to invest their own capital, there is more chance of the public company obtaining some decent looking initial production numbers and being able to put out some positive sounding announcements. Longer-term, the company probably will be lucky even to recover its investment, but short-term there could be some promotable numbers with initial production rates and future cash flows being (usually wrongly) extrapolated by promoters. It is all a very long way from meeting any “certainty” criteria though and in my view such deals have little attraction.
Parallel to this would be the acquisition of an old field, either with some existing production, shut-in wells or abandoned. The economics might be better than with a farm-in, but these really are projects for the hands-on, with experience and without any heavy overheads. They are not where riches may lie for the shareholders of small public companies.
A variation on the above and usually well avoided, is a company claiming to have some type of new technology, which can achieve production results which have eluded previous operators. Invariably, these types of companies are scams. If these technologies actually worked, established companies would be using them.
Slightly further up the scale would be a modest production acquisition. Again, there is little real potential since all there actually is going to be is a bread and butter business, but now having to carry champagne and caviar London public company overheads. These deals rarely work out for the shareholders, but for some reason, many investors can get excited by such transactions, and the other two types mentioned above, thinking that they are investing in a “real” oil company and, sadly, even when they lose their money, most still do not get it. These projects can also sometimes be profiled as “technology” type deals, with new production methods being applied to old fields, but as stated above, it is usually just the sign of a fraud.
Next up would be a farm-in to an existing exploration project, but this only really starts to become exciting if there is a drill coming up. If it is still at the stage where seismic needs to be acquired, it is unlikely to be a great near-term share price performer and the drill probably is still going to need to be financed anyway. As I have said before, being fully financed is an essential prerequisite.
Strongest is a farm-in to an upcoming drill, although the numbers have to be there to make success a potentially transformational event compared to the size of the company. As I have already mentioned, it needs to be fully funded, something that usually would be, and often is, done around the same time as the farm-in announcement. These types of deals are the ones that tend to work best from a promotional and short-term share price appreciation perspective.
It is critical to emphasise yet again that the project must be transformational and it must be fully funded. It is only then that the share price has the unfettered potential to run upwards as the key event approaches.
While there always will be some exceptions, generally these are the main types of deals. Fundamentally, what is important is whether there is a story with serious upside, good news flow and strong promotion, which is not going to have a damper put on it by further fundraising. Favourites in my opinion in the oil sector are high impact exploration projects with an imminent drill.
However, there are some important further aspects for these plays to be successful from the investor’s point of view. You do not want to see the placing to fund the project taking place at an already ramped up share price. The last placing, delivering fully funded status, is best if it takes place at a low point, not a high point, ideally well below any recent highs.
There need to be no convertible loans, investor sharing type agreements or similar devices outstanding. These simply constitute a death spiral and will kill any upwards share price performance dead.
Equally, it is best to avoid companies whose managements have previously demonstrated a liking for such arrangements. These are highly profitable for all involved, with the exception of the company’s shareholders. It is a step too far at the expense of investors in what is already a very one sided game in favour of the management and professionals in control.
Crucially, there must be no large numbers of cheap shares recently issued. It is necessary to watch out for conversions of debt and issues of shares during any preceding suspension, hence the critical importance of actually reading the relevant part of the admission document if appropriate.
It is generally better to buy in the market on subsequent weakness while the placing churns before the run up. Indeed, it is often quite possible at some point to buy under the placing price. As always, scale in. Buy in stages.
Most people see business as the selling of a product or service at a profit. The key essential is to offer a product or service that customers or clients want to buy. Without that, there is not a business. Obviously there are exceptions in the form of companies developing a product or service for future sale, but the financing of that is based on rigorous due diligence by the financiers. This is fine for real businesses, that is how it works, but when we enter the world of AIM and small cap companies, we go through the looking glass.
Many AIM and small cap companies are not focussed on selling a product or service, they are focussed on selling their shares. People do not even buy these shares because they want them as an investment, rather only because they think they can sell them again very soon at a profit. Most buyers do not really care that the funds are to finance the directors’ lifestyles, rather than develop a genuine business, ideally they probably would like all the money to be spent on promotion. Sadly, some buyers actually believe the story, hold the shares and in the vast majority of cases, lose their money.
The only people carrying the risk here are the investors. The directors generally have nothing to lose. They take their salaries, expenses and even bonuses regardless of the size of the company’s losses. If they do own shares, usually it will be ones they originally were issued for free or for very little, alternatively relatively nominal numbers of shares that they have bought in the market to demonstrate “confidence.” In some companies, the directors do not own any shares at all.
Generally, these companies can push on with their business projects for as long as they want, regardless of failure, and well beyond the point that any conventionally financed project would be able to go. They simply keep selling shares at ever lower prices, cooperating with promoters as needed by delivering bullish sounding news. As long as investors or traders think they can flip their shares at a profit, the game continues. All risk is on the investors. The insiders can only profit.
All the way through this, a project is being pursued, often completely cynically. Even years later and with millions of pounds of shareholders’ funds wasted, they can still keep going with their RNS announcements, “experts” reports, investor meetings and presentations. The unfortunate people who believe them keep buying at the new, ever lower, even better “bargain” prices. In the most tragic cases, people can invest everything they have and end up losing their life savings.
On the other side of the equation, everyone involved on the inside keeps earning. The directors, the auditors, the lawyers, the brokers, those short selling the shares before placings, the promoters, the paid for commentators. All without any risk at all. It is highly inequitable and very important always to remember this. Outside of the world of real businesses with effective corporate governance, any investor is very much exposed, with a serious risk of losing all, or a large part of, their investment.
At the end of the day, all the cash is coming indirectly from those buying in the market and directly from any unfortunates who got duped into taking a bad placing, or if it was a good one, got greedy and did not sell at the time at a profit. The situation with the “institutional” shareholders in these AIM and small cap companies has been discussed previously.
Think about how the money flows right from the beginning and let us take the example of a brand new AIM company. It is generally going to commence business by acquiring something from the people who are putting it together, for example, an oil and gas exploration permit, a mining lease, a patent, even just an idea. Ostensibly (and sometimes they are genuine, but can soon become corrupted) they are doing it to raise finance for the project. To float the company on AIM though will cost several hundred thousand pounds in professional fees. That does not make sense if the project is strong enough to raise the necessary funds from venture capitalists. The usual rebuttal to this point is that the venture capitalists are too demanding, want to impose too many controls and conditions, etc. Often, the real objection is that the venture capital firms are not going to allow these people to take money out of the company before there has actually been some success. And there it is: they want to raise the money from investors and they want to get paid either way, success or failure. They would also like to sell their shares in the company if possible and make several million pounds for themselves before it is even known whether or not the project is a success and before they have even returned any money to their investors.
The whole thing starts from a fairly bad place, often made worse by the type of behind the scenes characters who will front the substantial costs. The calculations are going to be about who gets how many shares and, most importantly, what the selling restrictions are. The more sophisticated, with a longer-term view, will look to ensure that however it is structured, using tame non-executive directors they control the board. And forget the idea of the professionals involved doing rigorous due diligence. For those involved with these types of companies, the only qualification required is the ability to pay their invoices.
Everyone right from the outset is thinking about making money from selling shares, not any actual business, which before very long they will not care at all about, but know they have to keep it going to keep getting the cash. To invest longer-term in such a company is madness, since it only can keep raising the necessary funds (often principally to cover directors’ salaries, fees and expenses, plus public company costs, “working capital” needs they call it) at ever decreasing share prices.
Funds at this initial pre-admission stage are raised from outsiders via an IPO process. It is nice to raise a large amount, but not absolutely necessary, the main objective is to get the company listed and trading (on the Stock Exchange that is). Quite often, the shares just go to a discount, due to some insider being able to sell from the off. The main thing is that they have got a vehicle and whoever actually controls it then can do whatever they want with the company.
If the deal does not work from the perspective of obtaining investor interest in the project, then the company can simply change direction, which also provides the opportunity to remove any individuals who may have become troublesome and are not “on the same page” as those in charge who are focussed on getting the short-term cash. This can easily be done: remember the objective of the professional operator right from the outset is to control the board, so they can then do whatever they want.
The hard work is preparing and clearing the initial admission document/prospectus and that is what most of the upfront money for the professional advisers is for. Thereafter, if the company changes direction gradually, it can hope to avoid the need for another admission document or prospectus, which can also entail a lengthy trading suspension, from which some companies never return.
Future financing will be done as previously described, but those directors who feel uncomfortable about what is often entailed and who also do not care about the share price, can simply turn to a convertible loan provider, who will do the work for them. The logical extension would be for the company just to sell its own shares directly into the market, but that has to be done via a legally tight investor sharing agreement or equity sharing facility. At that point though, the situation would be so far gone that it is really just the end game, with the directors trying to get whatever cash they can, before a boardroom change will be necessary and a substantial share consolidation.
Once the company is up and running, matters get easier for the controller though. As mentioned above, providing the company does not enter into a transaction that could be classed as a reverse takeover, there is no need to produce any further detailed documentation. It can transition into another area with ease. Some companies simply follow investing trends, jumping on every band wagon they see.
Remember, the cash is always coming out of the market, whether the shares are being sold short to be covered in later placings, or being flipped by those taking the placings to recover their investments. That is why promotion and volume is so important. But with what is clearly an inefficient use of capital (it is being used to cover bloated public company overheads, large salaries and the losses of the low quality projects in which most of these companies are involved), their shares are simply never good investments beyond a short-term trade.
The greater problem and it affects everyone involved, is that with no wealth being created by these AIM and small cap companies, in fact quite the opposite, the market as a whole must continuously contract due to the money being sucked out of it and thus can only keep going at the same level of activity in total money value if new investors continuously get involved. It is not business as normal business people understand that word, rather a constant transfer of wealth from investors to City insiders. It is simply not where to invest long-term.
This is why it is necessary to be extremely cautious. Money can be made, but only at a certain part of the cycle. Holding the vast majority of these companies beyond the short-term is most likely to result in losses, often substantial.
You may note that very few of these companies engage in usual businesses. If they did, the nonsense would become apparent. Everyone would see from the level of the losses the absurdity of paying six figure salaries from a corner shop size business and also at the same time carrying a huge public company overhead. That is why they have to trade on hope and oil, mining, pharmaceuticals and technology are perfect areas for that.
Essentially though they do it to transfer money from your pocket to theirs. They are not on your side, no matter how friendly they may present. They see you as a mark. And do not think you are just buying stock from other investors in the market, most likely it is coming from someone who either has got, or will get it from a placing, effectively putting the money straight into their hands.
As I said before, what you buy is hope, and the chance to flip the shares you have just acquired to someone else higher up. The conditions are an exciting event coming up and no further issues of stock in the meantime. I would suggest to always remember that.
Of course, you could question the desirability of getting involved in any of this, but I think the reason that it is attractive is because it is an imperfect market. I do not believe that many people involved in perfect markets, Forex for example, really can make continuous profits. The only ones who actually can do that are those traders at the banks who can see the order flows. Yet with these small companies, playing them right, you can consistently make money.
As I have stressed, it requires patience and a control of emotions, in particular FOMO (fear of missing out), but with discipline it works. It is important to be relaxed and never over extend yourself financially. That way, trading and taking profits becomes much more pleasurable and effective.
I have talked a lot about fundamentals and how with AIM and small cap companies perception can be more important than the underlying facts. What actually is needed is for the company to be able to put together a credible, compelling story which investors believe and is capable of moving the share price significantly higher.
It is the buying of others that matters and they are going to be driven by their perception of the company and project, supported by promoters’ and other investors’ endorsements. A strong, believable story with these AIM and small cap companies is key. It is the headline points that actually are going to affect the share price.
Even if you do the detailed research, or understand it all well enough not to need to, what do you achieve without advance knowledge of the company’s financing plan? Without that, it is not possible to know whether an investment actually will be profitable. So with these shares, one is always back to a short-term trading approach between financings.
Generally no company, no matter how bad, can not raise money in the London market. An announcement of a new business direction can be made, promoters engaged, volume created, shares sold and money raised. But these sort of pump and dumps will not get you anywhere over time unless you are part of the inner group. You might make some money on one or two, but overall you will lose.
You have to look for credibility in a company’s announcements. If they are shifty or evasive move on. Serious investors see through it. If it is all just forward looking statements, that again is a ground for caution. Key if there is going to be strong short-term share price performance is a compelling and credible, highly promotable story, with big headline numbers.
RNS announcements can appear ambiguous sometimes and are often deliberately drafted that way. They can play with tenses, dates and conditionality of events. However, they have to be true, unless we are looking at an outright fraud with the professional advisers complicit, and in the case of AIM companies, vetted and approved by the NOMAD. Therefore, reading carefully, word by word, it is possible to decipher what they actually mean. Most people will not do this and indeed can get very angry if it is pointed out to them that the actual meaning of the words is different to what they would like them to mean. Being diligent and dispassionate will give you a big advantage. Knowing what it actually says rather than what other investors might like it to say will put you well ahead of them.
One of the reasons the promotion game works is because most people just see what they want to see in RNS announcements. The understanding of someone holding (looking/hoping/praying for good news) often can be diametrically opposed to someone not holding. The holder seizes on anything that can be interpreted positively, ignoring the parts that in fact are negative. The reason this is important is that these companies need new buyers, who do not already hold the shares, so credibility in the announcements is essential.
As mentioned, the key is always to be heading for an event, fully financed. This is the point in time when most share price rises take place. You do not want to be in at an earlier stage, with the exploration financing still to be done, or be in after the event, when the development finance will need to be done, but without the original excitement.
It has to be emphasised yet again that the project must be potentially transformational and it must be fully funded. It is only then that the share price has the unfettered potential to run upwards as the key event approaches. Fundamentally, what is important is that there is a story with serious upside, good news flow and strong promotion, which is not going to have a damper put on it by further fundraising.
As stated previously, there are some important further aspects, which I shall repeat: you do not want to see the placing to fund the project taking place at an already ramped up share price. The last placing, delivering fully funded status, is best if it takes place at a low point, not a high point, ideally well below any recent highs.
There need to be no convertible loans, investor sharing type agreements or similar devices outstanding. These simply constitute a death spiral and will kill any share price performance dead. Equally, it is best to avoid companies whose management have previously demonstrated a liking for such arrangements. These are highly profitable for all involved, with the exception of the company’s shareholders.
Crucially, there must be no large numbers of cheap shares recently issued. It is necessary to watch out for conversions of debt and issues of shares during any preceding suspension or prior to the original admission, hence the critical importance of actually reading the relevant part of the admission document(s) if appropriate. You need to know who could be selling, at what price, and how much.
Rather than taking placings, it is generally better to buy in the market on subsequent weakness while the placing churns before the run up. Indeed, it is often quite possible at some point to buy under the placing price. Scale in. Buy in stages.
If you fancy the idea of taking placings, remember that the broker will be calling you regularly touting all sorts of unattractive propositions and you risk being badgered into transactions that may not be in your best interests. Better to remain detached and review everything from a distance without any pressure.
Do not allow yourself ever to be triggered by a social media post, or someone else’s opinion. Ignore the promotional marketing aimed at the less knowledgeable, focusing only on the points that actually are important. Conviction in purchases is key and you will not obtain that just by listening to other people. You have to believe it yourself.
Now, not all companies are as bad as I describe, some directors genuinely are trying to succeed, but the financing dynamics which I have discussed previously are always there. Look for the shorter-term run rather than the longer-term hold. Control emotions and never fall in love with a share.
My take on shares and the market is different to many, but the approach I adopt has served me well. It might not result in as many trades, but what it does do is ensure that virtually all end in profit.
What I like most is a big drill, not one being undertaken by an already producing company, rather by an exploration company with no production. The numbers have to be potentially transformational in relation to its current market capitalisation and I want to see the drill being financed entirely by equity (no convertible debt or anything similar) at a share price towards the bottom of its recent trading range. Best is a company that has been around for a while with no large tranches of cheaply issued shares extant. Credible management is good, as are credible partners. Let them do their placing, then gradually scale in as it churns (remember there has to be time enough for that between the placing and the spud). Then, providing they are not lying about dates, contracts, etc. (which is why I keep stressing the word credible) the shares will start moving up. I de-risk as the price rises to run the whole position for free and thereafter start to gently bank profit.
The same principles apply for other sectors: the company just needs to be heading for a potentially transformational event, fully financed. Scale in slowly to something where the dynamics indicate it will move up.
These trades do not happen every week, but there are enough every year to make good money. Success also requires doing nothing at times, yet doing nothing sometimes is the hardest thing to do. People often want to be in every trade, but to win it is important to learn to trade only when everything is in your favour.
Other plays than outlined above require more subjective analysis. To do this, you need to develop a good understanding of the market and the information sources should be company announcements and share prices, not uninformed gossip on social media. The more you study the raw data, the more you will learn about it. Decisions must be based on facts, not fallacies which you would like to be true. Conviction can only be based upon your own assessment of the facts, not the thoughts and opinions of others. You have to be strong enough to believe in yourself and your own knowledge.
Remember that ultimately these companies’ business projects usually fail. Focus on the strength of the near-term story and the key points that actually are going to impact the short-term share price performance. The test again is does the company have a credible, compelling story, strong and believable enough to entice large numbers of future investors to buy it, and which is sufficiently powerful to be capable of moving the share price significantly higher. Keep all of this in mind and ignore the irrelevancies.
As I have stressed, it requires patience and a control of emotions, in particular FOMO (fear of missing out), but with discipline it works. It is important to be relaxed and never over extend yourself financially. That way, as I said before, trading and taking profits becomes both pleasurable and effective.
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