Take Your Pennies To The TSX Venture

Take Your Pennies To The TSX Venture

Topic Cover:  Investing Basics, Investment, Stocks, Volatility

 The U.S. Securities and Exchange Commission (SEC) defines a penny stock as a "low-priced (below $5) … speculative security of very small companies." Penny and micro-cap stocks trade on mini-exchanges that are loosely referred to as "junior markets" or "junior listings." These markets are typically hosted by larger exchanges and rarely have physical locations, relying mostly on online brokerage platforms to service investors. They play an important function in financial reporting; depending on the exchange and overarching regulatory body, it may not be mandatory for small-cap firms to report even their basic financial statements.

Penny Stock Risk

Because of the nature of the penny stock market, potential investors should beware: penny stocks are notorious for the relative opaqueness of their issuing companies as well as for the many cases of fraud within the market. An investment in a penny stock is intrinsically speculative in nature and highly risky. Famed trader Nassim Taleb championed penny stocks for their high upside, however, citing their lower valuations as an opportunity for investors to capitalize on black swan events as opposed to being destroyed by exposure to them. While some penny stocks certainly have this kind of upside, most are toxic and extremely dangerous investment vehicles. Investors should proceed with caution.

 On the whole, start-up companies are desperate for more reputable junior markets and listings that will grant their ownership shares legitimacy and inspire investment and active trading. Quite simply, issuing companies want these items to be fulfilled so they can quickly and easily raise equity capital. Enter the TSX Venture.

 

Not Just Any Venture

The TSX Venture Exchange is a Canadian-based junior listings market that houses many micro-cap and small-cap firms. This exchange provides start-up firms the opportunity to raise equity capital and is owned by the TMX Group, a conglomerate financial services firm that primary deals in trading and clearing. The TMX Group acts as either a parent company or holding company for the Toronto Stock Exchange (TSX), TSX Select, the Equicom Group Inc. and Shorcan Brokers Inc., among other subsidiaries and companies that TMX Group has taken an ownership interest in. Out of these, the Toronto Stock Exchange is most notable; the exchange was founded in 1861 and is the foremost exchange in all of Canada, as well as being worldwide leader in the mining and energy sectors.

Until September 2012, the TMX Group itself traded on the Toronto Stock Exchange; however, it was acquired by TMX Group Limited (previously known as the "Maple Group Acquisition Corporation") on Sept. 14, 2012, and its shares were taken off the market. Today, you can trade shares of TMX Group Limited on the Toronto Stock Exchange under ticker symbol "X." The TMX Group is a highly successful company with reported operating revenue of $167.5 million in the second quarter of 2012, up from Q1 operating earnings of $162.3 million.

An Attractive Offering Indeed

As noted above, the TSX Venture Exchange is a subsidiary of TMX Group. The exchange benefits from this arrangement by being viewed favorably in the marketplace, based off the sterling reputation of the parent company. Thus, many qualifying companies were interested in applying for a listing. Other exchanges such as the OTC Markets Group Inc., known as the "Pink Sheet stocks," suffer from poor reputations of defrauding and misinforming their clients.

 The different types of fraud on the penny stock market are varied and insidious. One such scheme is the "pump and dump" operation, where either the issuing company or a third party will do all it can to artificially prop up the price of its equity on the market. Then, when the stocks are sufficiently "pumped" up, the outside party will quickly liquidate its position and "dump" its entire holding back onto the market. Penny stock companies have even been known to pay celebrities to promote their equity offerings; most famously, 50 Cent's endorsement of a small penny stock firm on Twitter allowed him to cash out some millions richer when his Twitter followers took the bait.

Relative to other listings, the TSX Venture Exchange provides a high level of transparency for investors. Similar to the Toronto Stock Exchange, the TSX Venture Exchange is well regulated by the Alberta Securities Commission as well as other provincial securities regulators. Companies that are listed on the exchange must report their quarterly financial statements and interim MD&A, annual financial statements and MD&A, an annual report, etc. All in all, the TSX Venture is a better-regulated and comprehensive source of information for investors seeking to trade penny stocks. The exchange's high standards keep the good guys in and the bad guys out.

 

Not for Everyone

Despite the appeal of the TSX Venture offering, an investment in penny stocks is not for every investor. Although the TSX Venture Exchange may be a better penny stock exchange than most, it is better to have previous knowledge of the industries that you are investing in. Information provided by the issuing company may not be satisfactory to make sound investment decisions upon.

In addition, penny stocks are not for those who can't afford to lose big. The risks inherent to a penny stock are massive. As an inherently speculative investment, capital allocation to an investment vehicle classified as a penny stock is only for investors with the proper time horizons, liquidity needs and time preferences.

 

The Bottom Line

In the words of Burton Malkiel, there are not very many $100 bills lying around to be picked up. Most of the time, something that sounds like too good to be true probably is. Investors should be wary of the associated risks of penny stocks as well as the many dangers of fraud. That being said, the TSX Venture Exchange is a very legitimate enterprise - on par with the Nasdaq Smallcap Market and the American Stock Exchange (AMEX) in the U.S. Penny stock investments should only be made, by properly informed investors, with an exchange that has the standards of the TSX Venture

Can Regular Investors Beat The Market?

Can Regular Investors Beat The Market?

Topic Covers:

 Day Trading, ETFs, Investing Basics, Investment, Portfolio Management, Stocks

 We all invest with the hopes that one day we will have enough money to live off our investments. The question remains, can a regular investor like us really beat the market? Do we have what it takes to win over the middlemen and institutions that have millions or even billions invested in the market? According to Terrance Odean, a finance professor at the University of California, Berkley's Haas School of Business, "Many of the mistakes investors make come from a lack of any understanding of the innate disadvantages they face."

David and Goliath

The answer to this question is not an easy one, and the answers will vary depending on who you ask. By "beating the market" we're talking about everyday working Americans who try to obtain greater capital gains and income return than the S&P 500.
David E. Y. Sarna author of "History Of Greed," explains it this way, "We all have some larceny in us. We buy securities because we think we know someone or something others don't. I don't think anyone can consistently outperform the S&P 500 without assuming greater than market risk."

 Some of us might have the tools (and connections) required to make knowledgeable decisions that will lead us to a portfolio with higher returns, but others like stockbrokers, bankers and big corporations most likely have an advantage, right? While many people in the financial industry have insider information which they cannot legally trade on, they also possess the necessary financial statement analysis skills to develop a greater insight about a given company. Robert Laura, author of "Naked Retirement: A Stimulating Guide To A More Meaningful Retirement" and President of SYNERGOS Financial Group says, "The reality is there will always be a lure to try and beat the market, especially since those who have beat it consistently are revered so highly (Bill Miller, Peter Lynch) and/or are compensated well (hedge fund managers). I think the market can be beaten, but even a broken clock is right twice a day. Best way to describe it: It's possible but not probable."

According to Laura, the sad reality is, the average individual investor has little chance of beating the market. He says the common investor uses mutual funds, are stuck in 401(k) plans which essentially track the broader index, and pay higher fees as compared to stock, index funds or ETFs. Also many mutual fund type investments don't use stop loss order to protect gains and thus do not always provide the type of protection individualized portfolios can perform. As he puts it, "investors are set-up to fail from the get-go."

Investing in 401(k)s is no better. "Most 401(k)s aren't benchmarked and most companies don't have a good investment policy for selecting funds within the program. You can't even get some asset classes in many and most advisors are sales people, not fiduciaries and just taught how to sell funds," he adds.

The good thing is many more investors are taking responsibility and interest in their investments. They are taking the initiative to learn how their investments work and are less intimidated. Laura says investors are learning that individual stocks aren't as scary as everyone suggests and there is valuable information available to everyone if they know where to find it and how to apply it.

 He adds, "The advent of ETFs and Index investing allow people to mimic the market, instead of trying to beat it, which is a better, less expensive perspective to have."
A Lost Cause?

Founder of FinancialMentor.com, Todd R. Tresidder, said in 2010 "All the evidence supports the disappointing fact that regular investors as a whole underperform the market. As long as they try to 'beat the market' they actually underperform."
The best way for regular investors to achieve better risk-adjusted returns is by focusing not on out performance, says Tresidder, but instead by losing less. In other words, regular investors have one competitive advantage - liquidity. "Big investors are the market but the little guy is nimble and can buy or sell without affecting the market - something the big guy can't do. Systematic risk management can work to provide regular investors with similar or slightly improved investment performance relative to the market at substantially less risk," he says.
Helping the Odds

What can an investor do to increase their chances of "beating" the market? Laura says there are several things:

Use low cost funds and/or a low cost platform for trades. The best way to make money is to save money.

Establish and follow a discipline which translates into just doing what you said you are going to do.

Give every investment in your portfolio a buy price, hold price and sell price along with one or two reasons to buy, hold or sell at that value. This gives you specific criteria to act and provides your portfolio with purpose and specific direction.
Watch for headline risk. Set up email alerts for your investments so as new information comes out about them, you are aware of it in the early stages to consider changes. Mark your calendar for things to watch like earning dates, intellectual property timelines and industry reports like Federal Reserve meetings, unemployment numbers, new housing starts and other information that will affect the specific sector or security.
 Sarna suggests investing in what you know and understand, such as solid, profitable small-caps and even microcaps in niches you can monitor and understand. These can appreciate much more rapidly than equivalently-priced large-caps.

 The only way to get above market returns is to develop a competitive advantage says Tresidder. "It is either developed through knowledge and information flow, or it is developed through extensive research resulting in an investment strategy that exploits irregular market behavior."

According to Tresidder, the only way to outperform the markets is to develop a competitive advantage that exceeds transaction costs and passive market return.

The Bottom Line

The debate of whether an individual investor can beat the market is as old as the stock market itself. Those who have found fortune investing will often preach that they possess superior analytical skills which allowed them to predict the market. Those investors who suffer losses will tell a much different tale.