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2004-01-28 17:08:27

Investors Begin To Make Presence Felt

Once the size and frequency of trades are discounted, trading on the Bahamas International Stock Exchange (BISX) is the same as trading on any other stock exchange.

Investors want a return on their investment; they have expectations and when these are not being met they act.

Investor behaviour on the BISX has had a profound effect on the share prices and hence the short-term capital value of companies.

Some listed companies are trading below their Net Asset Value and are enjoying share price increases.

The market is working to the extent that those companies who can no longer provide a return in the form of dividends are finding their share prices reflecting the true state of the company. In fact at least one company's failure to provide an acceptable level of performance has had its shares de-listed.

Management at other companies whose share prices have dropped drastically, are feverishly trying to return their companies to a level of performance that increases shareholder value.

The conventional wisdom is that price should reflect the true value of the company; but that is not always the case. Warren Buffett has made a fortune precisely because the price does not always reflect the true value of the company. He has bought at discounted prices and then held his investments for the long term.

One of the anomalies for investors and company executives alike is that a relatively small trade on the BISX can change the price of a company's shares. Coupled with the size was the fact that investors could quote their own prices whether they were selling or buying.

“A trade of 1,000 shares can affect the price," said Velma Miller, a trader at Fidelity Capital Markets. “You also had cases where an investor would ask $10 for a $6 share or a buyer would offer to buy at a ridiculously low price."

Belief in market forces notwithstanding, the markets must approximate some semblance of reality. To ensure a rational market, the BISX established guidelines for selling and buying shares.

“I think it was last February when it came into force," Ms. Miller said. “Prices could be no more than 10 percent higher or lower than the last traded price of the share in question."

Over the past week (see Journal Market Report) investors traded over 40,000 shares of Abaco Markets, which prior to last week was trading at $1.49 and closed the week at $1.39.

Tamara Evans, a trader at Colina Financial Advisors said “it wasn't the 40,000 shares that affected the price but the 1,500 shares traded on Friday that brought the closing price to $1.39."

Ms. Evans explained that the 40,000 changed hands but had no effect on the price. Sometimes such transactions are between family members and the shares merely “change hands" at the current market price.

“In that case the seller had gone out and found a buyer," Ms. Evans explained. “But there is a requirement that the transactions be registered on the BISX."

 Even in the case of leaving shares in one's will it is important, especially if the amounts are significant, that investors and the public know what is happening with the ownership of the shares. Registering the shares ensures some transparency.

The agreement between the seller and the buyer in such cases has no effect on the price. Ms. Evans explained that in such cases the trader does not receive a fee because they merely reporting the transaction to the BISX.

“The seller would come in and give the details and we register the transaction," she said. “In such cases the trader does not charge a fee."

Both traders agreed that “unless something significant" happened, they expected to see Abaco Markets share price move closer toward the discounted rights offering of $1.

Ms. Miller said that because of the 10 percent rule, it would take some time but eventually she expected that the market would reflect that discounted price.

Ms. Evans said, “Investors are looking for companies that pay dividends. Companies like Abaco Markets and Freeport Concrete which have been experiencing some difficulties and have not paid dividends are not in demand."

Ms. Evans said that companies paying between five and six percent dividends were attractive to investors and their prices would eventually increase, except that traders are people.

Asked to explain the anomaly of Commonwealth Bank dropping $0.20 in last week's trading of 10,000 shares, Ms. Evans said that buyers of large blocks of shares usually do so at a discount.

“No one expects a buyer of large blocks of shares to pay the market price," she explained. “Often the price drop is a reflection of the discount given to the buyer."

She said if the company's latest quarterly figures are on or above target and there was no change in management or any other adverse news, “you should see the price going back up to what it was before the trade."

Ms. Evans said that quite often investors would see some activity in their shares and then a significant trade happens and the price drops. She said sometimes investors seeing the drop decide that something is wrong because of the drop in price and “the herd mentality kicks in."

“In such cases investors need to speak with their broker or check and see if something has happened at the company itself – management change – to see why the drop," Ms. Evans said.

By not checking to see why the price has dropped, some investors fearing the worse decide to sell and in so doing trigger the very outcome they do not want, a drop in price and hence the value of their shares.

C. E. Huggins, The Bahama Journal 

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