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Stock Share Structure NEW!

After you've narrowed down your list of potential "Hot Penny Stocks" using technical and fundamental analysis, there is one very crucial checkup you must make. You must determine the stock's current 'share structure'. The share structure is extremely important in determining how a stock will move with buying and selling pressure, and how the company is valued on the market. We will define share structure and each component, analyze their effects, and suggest some guidelines for combing through your potential stocks.

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What is 'Share Structure'?

-Share Structure is a breakdown of the amount of, and types of stock the company has issued. The number of 'outstanding shares' (O/S) as well as the number of available shares on the market, the 'float', have the biggest effect on how a stock will trade, or in other words, how hot the stock might get.

What are 'Outstanding Shares'?

-Outstanding shares are the total number of shares issued by the company, including free trading and 'restricted' stock.

What shares consist of the 'Float'?

-The float consists of all the outstanding shares that are not restricted. Essentially meaning the shares that are available to exchange between traders/investors on the open market.

How does the size of the 'Float' affect a stock?

To understand the mechanics behind share structure, let us consider the effect of the float size. The current float of a stock is the number one factor that determines how a stock will react to buying and selling pressure. If there are tons of shares available on the market, ordinary share holders and 'market makers' will be able to sell these while the price moves slowly and in small increments. If the float is low and buying pressure is high, the price will be forced up to levels where shares are available. So, the ideal stock is one with a relatively low number of outstanding shares, and a relatively low float.

There is a negative side of having too small of a float, though. Without many shares "floating" around, it may be difficult to purchase shares without 'chasing' the ask. The more money you are trying to put in, the harder it will be. On the other side, it will often be difficult to sell your shares once you have them, unless there are enough buyers, a big enough buyer to sell all of your shares to, or you are willing to sell your shares for a substantial discount from the current price. Because of this, low float stocks can be very volatile, moving huge percentages in a matter of minutes, or even seconds. These can be far too dangerous for beginners, and should be traded only after some solid trading experience.

To start off, you will want to trade a stock with a medium number of outstanding shares, and medium float. For penny stocks this generally equates to an O/S count of around 100-500 million, and a float ~50-90% of the O/S. This is going to vary depending on the price of the stock. Stocks with a higher Price Per Share (PPS) can be just as easy to trade having a lower O/S and vice-versa.

What are 'Restricted Shares'?

It is usually good to see that the company has some restricted stock issued, and a float lower than the O/S is indicative of this. An investor doing his homework will try to find out who is holding them, and beware of when shares may become unrestricted. Restricted shares are often times issued to others as payment for a service; ie - website development, consulting, legal services, etc. Beware that when they go un-restricted, usually after one year, the individual(s) may dump the shares at market to cash in. Restricted shares are also often held by company insiders. If management, including the CEO, are accepting restricted shares as compensation, you might infer that they have a vested interest in seeing their stock do well... If they keep holding them past the restriction period, this is an even better sign.

What is an 'Authorized Share Count A/S'?

Above you see that when I talk about the float, I specify that the current float is what is important. In addition to the O/S and float, there is also the 'authorized share' count, or A/S. This is the currently authorized maximum amount of shares that can be issued into the market. This number reveals a very important thing; the number of shares that can be sold into the market by the company, AKA 'dilution'. For this reason, traders will often be reluctant to load up shares if the O/S is much lower than the A/S. The reason being is the less shares the company has left to sell, the lower the chance of destructive dilution. Be aware, however, that a pink sheet or OTC company can increase their A/S on short notice.

If the company's transfer agent, or TA is "gagged", you will have no way of knowing changes to the A/S, O/S, or float. We do not recommend playing a stock with a gagged TA for anything more than a quick trade. If the stock isn't gagged, it may be prudent to contact the company and/or transfer agent on a regular basis to confirm there are no increases in the share structure. This way you will be one of the first to know of dilution, and can sell before losing a chunk of your investment. Click the link below for more information on gagged transfer agents.

What is a Transfer Agent, and what is a "Gagged" TA?

What's Next?

Now that you can narrow down to a few hot penny stocks to choose from, which one should you go with, you ask? Well, where is everyone else going?... Check out the next page to see the best penny stock forums and message boards.

Hot Penny Stocks <- Previous Page Next Page -> Penny Stock Forums
'Chasing' is often the term used when a trader continually increases their bid price in an effort to get shares on a quickly rising stock. Click the term to see more information about chasing and whether you should do it...
'Dilution' is the selling of new shares into the market. Dilution increases the number of outstanding shares, and usually damages share price. Click the term to see more information on dilution and other "bad company actions".


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