Share price and share volume are related, but often the financial media talks only about share price.
In the news this morning, money-losing IPO tech-that-is-not-tech company "Snapchat" drops in price below its IPO offering price as the 120 day lockout period for insiders ends, and everyone expects the insiders will start dumping shares on the market shortly.
Snapchat, in case you haven't followed it, is a "social media company" (read: website) that allows middle-schoolers to send naked pictures of themselves to each other without having to worry about violating child-porn laws. The photos automatically erase from the site, so there is no footprint for Mom and Dad or the Police to follow. The company has lost $2.2 Billion in the last quarter alone - about 1/10th of its vaunted "Market Cap" which as I noted before is a largely made-up number
They have lost more money than Tesla and Twitter combined. Their losses from last quarter amount to more than 2/3 of the money they raised in their vaunted IPO. They have been losing money since day one, and the losses have, if anything, accelerated. How long can the company keep going on? How much cash do they have on hand to keep the lights on and servers running? Beats me, data is hard to come by. Although Google has some pretty alarming operating data, they don't show cash-on-hand.
Not that most people read S-1 filings or even bother to google the P/E ratio, profits, dividends, or whatever. The vast majority of Snapchat "investors" I believe, are merely following the hype. This is a popular thing with the kids, so it must be worthwhile investing in! Right? Well, you can have a popular website, but it means nothing if it doesn't make money for you eventually. And so far, it ain't making money.
Maybe some larger player like Facebook will buy it out - for a pittance - later on, but increasingly, the major players in the market are finding it easier just to launch their own product in the marketplace. Groupon spurned a buyout form Google for $6 Billion, so Google merely came up with their own version. And today, there are over 500 Groupon-like sites, and you don't hear much about Groupon anymore. Yea, it was "popular" but all companies have to eventually earn a profit or they die. And no, this rule isn't up for discussion or bendable in any way, no matter how you think "tech" changes this. And no, coupons is not tech.
As Snapchat's own S-1 filing admits:
Snapchat is free and easy to join, the barrier to entry for new entrants is low, and the switching costs to another platform are also low. Moreover, the majority of our users are 18-34 years old. This demographic may be less brand loyal and more likely to follow trends than other demographics. These factors may lead users to switch to another product, which would negatively affect our user retention, growth, and engagement. Snapchat also may not be able to penetrate other demographics in a meaningful manner. For example, users 25 and older visited Snapchat approximately 12 times and spent approximately 20 minutes on Snapchat every day on average in the quarter ended December 31, 2016, while users younger than 25 visited Snapchat over 20 times and spent over 30 minutes on Snapchat every day on average during the same period. Falling user retention, growth, or engagement could make Snapchat less attractive to advertisers and partners, which may seriously harm our business.
In other words, this is a fad, and we haven't made any money from the fad. And moreover, if they can't figure out how to make money from it before the fad fades, it is all over.
But that is not what this post is all about. Everyone pretty much knew that Snapchat was yet another IPO allowing the insiders to cash out and that the stock price was way over-valued. Everyone, except, of course, individual small traders who read the hype and ordered 100 shares on E*Trade figuring "what have I got to lose?" These are the gamblers in the market, who have turned the NASDAQ into a casino.
But share volume is something to consider besides share price. Sadly, the financial press just talks about share price, but never profits, P/E ratios, dividends, or other metrics. But even if you are just following share price (because you are a motley fool) it is wise to understand how volume affects price.
Recently, there was an incident where someone dumped a pile of Bitcoins on the market and the price tanked. Some think it was a "heavy thumb" error - where they typed the wrong number into their sales order. But the point was made - the amount hitting the market was more than the market could absorb and the price of bitcoin went from thousands of dollars down to hundreds of dollars, and back up again quickly.
The same would be true for nearly any stock or other commodity. And that is why I say that "Market Cap" is bullshit. If Bill Gates dumped all his Microsoft stock on the market tomorrow, the price would plummet - to less than half its current value. Why? Well, in addition to the founder cashing out (which would raise eyebrows) the market simply could not absorb all those shares. Not enough people would be willing to buy, so the share price would drop. It is like buying in bulk - the more you buy, the lower the price. Except this time it is stocks, and when huge chunks of stock are sold like that, the price of everyone's shares plummets.
And that is why Snapchat stock is plummeting today - the market anticipated that the insiders will start to dump shares on the market, and there won't be enough people to buy them. The dreaded fool shortage strikes again. People hope that when they buy these speculative stocks, a greater fool will buy them for more money. But eventually we run out of fools.
One way to avoid this, of course, is to sell only small portions of stock at a time. Lockout periods were designed to prevent such stock dumps early on, but end up just delaying the process. And like OPEC, if there are several shareholders who want to "cash out" of this dog stock, it becomes a classic race to the bottom. They might agree to sell only a dribble at a time, but the one who cheats on this agreement ends up cashing in - while the one who holds true finds the share price has bottomed out, and they can't sell at any price.
One way to avoid this, of course, is to sell only small portions of stock at a time. Lockout periods were designed to prevent such stock dumps early on, but end up just delaying the process. And like OPEC, if there are several shareholders who want to "cash out" of this dog stock, it becomes a classic race to the bottom. They might agree to sell only a dribble at a time, but the one who cheats on this agreement ends up cashing in - while the one who holds true finds the share price has bottomed out, and they can't sell at any price.
For thinly traded stocks, this problem is even worse. Say you buy shares in a family-owned company. Mom, Dad, and the Kids own 90% of the shares, and you and a bunch of other idiots own 10%. You may not even have voting rights, as there may be multiple classes of shares (sounds a lot like an IPO we know of!). The point is, you want to sell your shares, no one else wants to buy. Most people don't even know the company exists, or if they do, aren't interested. Mom, Dad, and the Kids are really the only people interested in buying your stock - at a steep discount, of course.
Speaking of which, why would they issue shares to the public that are non-voting? Well, say Mom and Dad have 45% of the shares, and the Kids have 45%. Neither has a controlling interest in the company. If one half bought 6% of the outstanding shares they sold to the public, though, they could control the company. That would make those public shares actually worth something. It might even start a bidding war. And we can't have that. We can't have the small investor actually making out, can we? Of course, being a minority shareholder in a small, family-run company is just throwing money away - the subject for another posting. Mom and Dad and the Kids put themselves on the payroll, cash in big time, and never pay a dividend. You might as well flush money down the toilet.
Oh, wait, these "tech" IPOs that sell off 5% of the company in stock are about the same deal, aren't they?
But I digress. The point is, share volume affects share price. When no one is selling their shares, price can go up, as demand exceeds supply. When everyone wants to sell, there may not be enough buyers, and share price can plummet. So you see now why companies want the prognosticators on the financial channels to say nice things about their company - so that demand increases and existing shareholders will be reluctant to sell, further driving up the share price.
Share price of a stock, as I have noted before, is an irrational number. It is rarely in tune with the real value of the company or its financial performance. It is based on perception and perception can change. Sure, there are people who "crunch the numbers" and look at profits, dividends, and whatnot. But there are others who just look at a chart showing share price and say, "Hey, that's going up in price, I should buy it!" - and this is how we end up with P/E ratios in the hundreds.
Prognosticators and financial analysts can also suppress a share price, by harping on negatives - again which eventually profits someone, somewhere. You trash-talk a stock on your financial show, and then snap up the shares when they plummet in price the next day, or better yet, you short-sold the shares the day before. And in this regard, I look back on some trades I have made - even recent trades - and wonder whether I am being manipulated by the media into buying or selling.
Supply and Demand determines share price more than metrics. And demand can be spoofed by hype and deception, such as in the typical "roadshow" leading up to an IPO. Once the dust settles, the insiders cash-out, which in turn can lead to supply greatly exceeding demand. The small investor, who fell for the IPO hype, may find himself losing a lot of money in the process.
The easiest way to avoid this trap is to simply avoid buying hyped IPO stocks - which is to say, all IPO stocks. You are not going to be the next Paul Allen, so just get over it. Maybe 1 in 100 might have been a good buy - the rest were crap. It isn't worth the risk to think you are smart enough to buy the right one.
UPDATE: Some are saying that the dip in Snapchat stock has been caused by some prognosticators who are trash-talking the stock and at the same time, short-selling it. One bank says $15 a share is their "target" price, while Goldman sticks to $27 a share, without explanation. A finance journalist goes online and tuns down the stock, but at the same time, short-sells it.
My perspective? The fundamentals, aren't there and the kids are moving to Facebook's Instagram anyway. But regardless, it is just best, I think, as a small investor, to "sit out" these manipulated overpriced and overhyped stocks in money-losing companies.
You don't have to invest in every damn thing. Particularly when it gets a lot of attention in the press!
The easiest way to avoid this trap is to simply avoid buying hyped IPO stocks - which is to say, all IPO stocks. You are not going to be the next Paul Allen, so just get over it. Maybe 1 in 100 might have been a good buy - the rest were crap. It isn't worth the risk to think you are smart enough to buy the right one.
UPDATE: Some are saying that the dip in Snapchat stock has been caused by some prognosticators who are trash-talking the stock and at the same time, short-selling it. One bank says $15 a share is their "target" price, while Goldman sticks to $27 a share, without explanation. A finance journalist goes online and tuns down the stock, but at the same time, short-sells it.
My perspective? The fundamentals, aren't there and the kids are moving to Facebook's Instagram anyway. But regardless, it is just best, I think, as a small investor, to "sit out" these manipulated overpriced and overhyped stocks in money-losing companies.
You don't have to invest in every damn thing. Particularly when it gets a lot of attention in the press!
