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Low Prices Not Cause of Speculative Activity
In response to my letter Share Consolidation Not Helpful which was published in the ST Forum on 09 Oct 2014, Vincent Khoo wrote in and suggested that Share consolidation is good for retail investors.
My response to his letter was published on ST Forum yesterday.
My unedited letter Low prices not cause of speculative activity is appended below:
MR Vincent Khoo (“Share consolidation is good for retail investors”; Oct 20) asked why I am against share consolidation if it is a neutral exercise.
He is of the view that “if penny stock companies consolidate their shares, there will be less churning and punting of their shares.”
I beg to differ.
Some penny stocks are more prone to speculative activities not because of their low price, but because of their lack of institutional demand, low market capitalization and free float. This makes them prime targets for manipulation and speculation.
Doing share consolidation does nothing to change the quality or market capitalization of a company and is unlikely to lead to an increase in institutional interest.
After share consolidation, the same company trading at a higher price will still be subjected to churning and punting.
When Blumont, Asiasons and LionGold went on their miraculous price rise back in 2013, there continued to be heavy speculation in them even though their prices had risen way above $0.20, which is the proposed Minimum Trading Price (MTP).
The Small and Middle Capitalisation Companies Association (SMCCA), in their response to SGX’s consultation paper, has also given their views that implementing the MTP will not reduce excessive speculation.
On the other hand, it will increase issuers’ cost of listing on SGX and might even confuse shareholders when companies choose to consolidate shares.