Size Does Matter
Trading Strategies: Buying Stocks with a Low Float
Thursday, February 03, 2000 11:19 AM
by Chirag Amin, M.D.
Despite the recent downturn, many investors have been amazed by the resilience of
the current bull market, especially in the Internet sector. Those that have had a
long-term (i.e. > 9 months) time horizon, investing in the leading stocks in the Internet
sector, have been typically richly rewarded with annual returns well exceeding 100%.
Nevertheless, these rich returns were not easily obtained by any means. The vast
majority of Internet investors have had to deal with enormous, gut-wrenching volatility
in the Internet sector, causing many timid investors to panic and prematurely sell at a
significant loss. In the Internet sector, staying the course by keeping a long-term
horizon on the market leaders in the Internet sector has always been one of the most
important keys to success and prosperity.
For those more aggressive Internet investors who are able to stomach the high
volatility that is inherent within the Internet sector, one key trading strategy that I
frequently utilize has been associated with a significant amount of success, in terms
of achieving a stellar return. This strategy involves buying quality Internet stocks with
a low float.
Simply put, a stock's float is the number of shares of stock that is available for buying
and selling at a given time. Therefore, a stock's float is equivalent to the supply of a
given stock. Since the stock market works like any other classic marketplace, a
stock's price is determined by the supply and demand. A stock in short supply (i.e.
low float) that experiences a rise in demand results in a significant upward movement
in the stock's price. This is purely and simply due to supply and demand, as good
news would result in an increased trading volume due to increased demand, which, in
the presence of a limited supply (i.e. float), would result in a huge short covering
("short squeeze"), driving the stock price up very quickly.
When applying this principle, I tend to look for quality, industry-leading Internet stocks
that have a float of less than 10 million shares and an average trading volume
(ATV)/float ratio of approximately 7% or greater.
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All that said GNNU has a float of 1.6 million .. and 1.1 million are tightly held, leaving 500k to trade freely, that's precious little, so the supply/demand issue here will apply in a big way!
Cheers,
Mike |
