The world of penny shares is an exciting place to be for a private investor, a place where time spent learning about small companies often brings rich rewards. That's why I love writing about them and I guess that's why you're reading Penny Sleuth.
However, the route to penny share profits is not always a straightforward one
If you read Penny Sleuthon 5 January, you will recall the curious story of Worldlink (WGP).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Its shares were listed on the stock market in November, accompanied by the announcement that "the market capitalisation at listing is anticipated to be circa £55m and the opening share price approximately £2.50".
Given this official announcement, any shareholder who bought the shares on the first day of trading at the quoted price of £1.25 would have been entitled to think he or she had a bargain.
But a day later the share price was just 25p and it sank to a low of 10p. That was before my article provoked a rally.
It also provoked a response from the London Stock Exchange (LSE), whom I accused of turning a blind eye to this apparent misinformation.
A representative of the LSE called me to say that as Worldlink has its shares traded on the Stock Exchange's Main List, responsibility for its oversight lies with the Financial Services Authority (FSA). The LSE only has responsibility for companies that trade on AIM.
That seems crazy to me. Does it really make sense to have two regulatory authorities for quoted UK shares?
Worldlink: The plot thickens
Recently the plot has thickened with a number of developments, including a possible takeover bid for Worldlink. While it has been expanding the range of global data feeds it can make available to committed traders, and signed a deal to feed sports betting data to India's Dusane Infotech, it has also attracted the attention of The One Media Technology Corporation.
This Chicago-based private company aims to offer a combined package of tablet computers, operating software and the type of data-based services offered by Worldlink. To that end it has made a takeover approach to Worldlink.
You might have expected such an approach to propel the latter's share price back towards the 250p it apparently thinks it is worth. But in fact the share price is still just 30p. To add to the mystery, one of the advisers, Bridge Hall Stockbrokers, that put its name to the 250p statement, has since gone into liquidation
Now let me turn to another contentious issue for private investors: share placings'.
Share placings: Why you lose out
This preferred method for a company wishing to raise fresh capital sees its broker ring a handful of City institutions and favour them with some newly issued shares at a discounted price. To protect the interests of existing shareholders, companies on the LSE's Main List are only allowed to place shares up to a maximum of 10% of the existing share capital.
But there is no such limit for AIM-listed companies. They freely issue new shares, justifying this on the grounds of speed of execution and, because they need not publish an expensive prospectus, low cost.
Where small sums of money are raised through the issue of shares at narrow discount to the market price this is fair enough, but two recent issues look less than fair enough.
On 13 January, Falkland Oil & Gas (FOGL) placed 113m shares at 43p, a discount of 15% to the closing price on the previous day. This was no small matter, because it increased the total number of issued shares by 55% from 207 million to 320 million.
And on 26 January, Sirus Minerals (SXX) raised £50m through a placing of shares at 18p, a 23% discount to the previous closing price. This increased the issued share capital by 30%.
These are hefty amounts of money. The discounted offer surely would have been snapped up by the many small shareholders who have supported these companies. But they were not given the chance through, for example, a rights issue.
Both FOGL and Sirius have played by the letter of the law, but certainly not by its spirit. But what really sticks in the craw is the sight of these companies' directors helping themselves to discounted shares. Sirius's Russell Scrimshaw took 18.9 million new shares at 18p upon which he already has a paper profit of £472,500.
At the very least, I believe directors should be disallowed from participating in discounted share issues unless all shareholders have the same opportunity.
And in these days of instant electronic communication, it should surely be possible to allow individual shareholders access to share placings.
One more thing while I'm thinking about it is how we small investors should be better treated. It should also be possible for the names of private investors, often hidden within nominee accounts, to be on the shareholder register and thus acquire full voting rights.
This is something that you can do something about if you agree by signingthis e-petition to the government.
Rant over. Let me know what you think leave your comments below.
This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.
-
8 of the best houses for sale with outdoor swimming poolsThe best houses for sale with outdoor swimming pools – from a family house in Wimbledon Village, London, to a 1640s mansion in Derbyshire with a heated swimming pool in the grounds
-
Trouble brews in B&M as bargain shops take a hitOpinion Once a stock market darling, B&M's share price has slumped. What has gone wrong for bargain shops?
-
Somero: trading this overlooked bargainFeatures Mechanical-screed maker Somero dominates its niche and is attractively valued. Matthew Partridge picks the best way to trade it.
-
How to find big profits in small companiesCover Story The small- and micro-cap sectors are risky and volatile. But with careful research and patience, investors could make huge gains. Matthew Partridge explains how to find the market’s top tiddlers.
-
Is Aim finally coming of age?Features The Aim market of mostly smaller companies has traditionally been seen as a bit of a backwater. Is it time to change that view? Matthew Partridge talks to Paul Latham and Richard Power of fund management company Octopus.
-
Fetch! The Chinese small-cap stocks to buy in the Year of the DogOpinion Each week, a professional investor tells us where she’d put her money. This week: Tiffany Hsiao of Matthews Asia selects three Chinese small-cap stocks with exciting potential.
-
Small and mid-cap stocks with big potential
Opinion Professional investor Guy Anderson of the Mercantile Investment Trust selects three small and medium-sized firms with promising prospects that the market has missed.
-
Get cheap, reliable growth from smaller companiesFeatures One of the most reliable long-term investment trends is the long-term outperformance of smaller companies over blue chips. Max King picks some of the best ways to buy into this growth.
-
Big gains from small caps
Features In an environment of middling inflation and low interest rates, small-cap stocks tend to beat big blue-chips. John Stepek explains why, and how to invest in them.
-
Now the bitcoin bubble’s burst, what’s the next big thing?Features Forget bitcoin, if you want to increase your wealth faster than most other people, you need to find the next big thing. Merryn Somerset Webb suggests some places to look.
