The importance of Share Structure
For most traders the “story” of the company or ticker they are buying shares in is the most important factor in their buying decision. Sometimes they like the company’s products, services, CEO, management team, etc. The company’s job is also to sell you on this story through news and disclosure to keep you invested in their stock and buying more shares.
In all of this excitement about a company’s story something is lost and that is trading is a game of supply and demand. Demand for a company’s stock rises and in a perfect world the price will continue to rise as the supply of shares becomes worth more and more. Sounds awesome!
If it actually worked this way all stocks would only go up, and the act of dilution (selling shares from the OS into the float where retail traders trade) means that there can be incredible demand for a stock but the oversupply of shares makes it go down regardless. In my original video I drew a supply and demand curve on a heavily diluted chart.
You can see on this chart the new supply of volume beginning in July was first met with a spike of demand but over the next two months the unrelenting supply of new shares coming on-stream continued to bring the price down. Over this period of heavy dilution there were multiple news releases and a social media campaign to drum up investor interest.
Turnover Calculation:
When I started trading the OTC I saw a serious disconnect between volume and movement especially with lower priced securities. Something would have 500,000,000 in volume and move 20%, how could this be? Everyone always told me that “volume brings price” but above we are looking at a chart with move volume than ever and a price that only goes down. What I realized was that to trade OTC effectively I needed to focus more on dollar volume as opposed to pure share volume since 1 million shares of something trading at .0004 is only $400. Even if this stock brings in 100,000,000 in share volume that is a measly $4000 which is hardly a massive vote of confidence from the market.
My turnover calculation was created to help me understand how much real money it would take to buy ALL of the floating shares. As we know, the floating shares or “float” are the shares that retail traders like you and I are permitted to trade. While it isn’t a perfect 1:1 occurrence, consider your turnover calculation to be what it would take to move the stock 100% from where it is today. Turnover is calculated as follows:
Float x Current PPS = Turnover
Let’s use a current example in RAFA:
REMEMBER: In the absence of an updated float you can use Outstanding Shares — Restricted to calculate what your float most likely is.
When we spotted RAFA going current it was trading at .015 and the turnover calculation for it was $710,000. In the OTC, for a ticker to do $2–4 Million dollars in a day is a very big run with a ton of investor interest, so that $710,000 to turn the float was an okay place to get in as it could begin to turn that float over the course of a few days as opposed to happening all in one day. This is what began to happen to RAFA as more investors started getting interested in the story.
In the coming two months RAFA ended up hitting a high of .45. I was tempted to purchase RAFA to ride the wave but I abstained as the new turnover calculation meant for this float to turn over again at this price would would cost $31,950,000. To date, the most dollar volume that RAFA has ever done is $1,000,000 worth of shares traded in a day. The probability of my seeing upside from this entry moving forward given how much money it actually takes would be significantly less than my probability of seeing upside down low.
If it takes so much money to move RAFA why did it move so much in the days prior when the turnover calculation was still >$1,000,000?
This is true! and the phenomenon we are seeing is the polar opposite of the chart we looked at on RDGL earlier in the article. We are seeing a massive amount of demand pushing the price up and limited supply. People are buying and holding RAFA, and as that happens the amount of shares available on RAFA is getting smaller and smaller and the price is pushing higher and higher.
So why don’t you want to enter here then?
The reason I don’t want to enter here is because there is so much more downside from this point. People have only bought and held RAFA in the days prior. To see significant upside from this point could technically take almost $32,000,000 if they all started selling at this price and we know that OTC tickers that are on fire are generally only good for $2–4,000,000/day so how much upside could there really be for me at this point?
When RAFA was trading with a $710k turnover calculation, it was completely possible to have days that could turn the float over multiple times. At this new .45 price there is not much upside for me if you consider how much volume the OTC brings in.
How much volume does the OTC bring in?
On Friday, June 7th 2019 the OTC brought in 1.2 Billion dollars across 10,639 tickers:
To put it into perspective, if that dollar volume was evenly distributed between all of the tickers on the OTC each one would only get $112,000 in volume for the day.
$1,200,000,000 / 10,639 =$112,000
Contrast this with the Nasdaq where one popular ticker in BYND took in $2,875,000,000 itself on the same day (June 7th 2019). One ticker on a market (Nasdaq) with over 3500 active tickers did more than double the entire OTC market combined.
This is why the turnover calculation is of critical importance when you are considering entries on such an illiquid market. If it is going to take over $1,000,000 to turn the float you are more than welcome to trade it, but ask yourself if the reason you are buying it is one that is going to spark the interest of a market that does less than half of the dollar volume of one nationally popular ticker per day.
