Fundamental Analysis Terms Explained

Dilution

The selling of newly issued shares. The basis in which the entire stock market revolves around is the issuance of shares to acquire the capital to sustain and allow a company to grow. This is arguably the worst of the 4 'thieves', as it is 100% legal, even when done with 'less than good' intentions and done thru mis-representation. The less 'blue chip' a company is, the more likely the dilution will not bear fruit.

Enter the 'lifestyle' stock.

Lifestyle stocks (and they are VERY plenty, especially in Pinksheet issues) are stocks with good/great sounding stories, usually in the form of press releases. First and foremost, they provide CEO's with high salaries, regardless of CEO performance. They also provide the company with capital to support their own lives, using such guises as travel, meals, and entertainment as expenses. Automotive (BMW, Mercedes...you get the idea) expenses are common. Real-estate also falls into the classification as a company neccessity, 'stated' as a necessity for temporary housing for out-of-town clients, even if the 'client' may be a high school sweetheart from a different city. Shortly put, watch CAREFULLY and CLOSELY for lifestyle stocks. You can only profit from them once you are FULLY knowledgeable in their 'scam'.

Dilution is inevitable in all companies, given it's nature and value to a company. A 'good' company dilutes minimally, and gives shareholders 'value for their money', ie; increasing/improving bottom line fundamentals.

It is HIGHLY advised to locate the Transfer Agent (TA) of any company you wish to be invested in for more than 1 week. By frequently calling the TA, you can gain a neccessary understanding to what extent the company is diluting. TAs can give you the outstanding shares (o/s) for any date you ask. By knowing the o/s on the first of the last 3 months, gives a good idea of dilution rate.

Stay far away from an issue that the TA has been gagged, atleast until you have become VERY experienced in investing/trading. There is virtually NO good reason for a TA to be gagged.

Manipulation

This is a device used more by Market Makers (MMs) than others, but by no means, limited to them alone.

MMs rank right behind bankers, lawyers, politicians, and many CEOs.

They have the ability to create what appears to be volume and increase in pps (price per share), giving the false impression that a stock is going up in value. What is to be closely watched for is whether it is a sustained increase in pps, or only temporary.

They have the ability to 'over accentuate' a 'run' giving the impression the issue is going up quickly. Often, they will naked short shares at the HOD (high of day) only to buy them back (from you) on the retrace. They understand terms like 'weak hands', 'panic', 'fear', and have no qualms of using their skills to make themselves more money at your expense.

No one makes more money in the stock market, than MMs. Usually, it's YOUR money, they make!

MMs have an arsenal of tricks they use, of which would be impossible to outline them all. Other common ones are signals. Often, they will use 100 share trades to take a pps up or down, depending on what their desire is. If they have shares they want to sell, they will try to 'take it up', giving the appearance of a pps going up in value. Conversely, when they need shares, they 'take the pps down', on 100 share trades, hoping to 'shake weak hands' loose of their shares with the fear of a plumetting pps.

Another form of manipulation is performed by unscrupulous investors or investment bankers, usually by 'bidwhacking' a pps down, so as to buy more shares at lower prices, whether on the open market or thru private placements. (A private placement is when a company sells shares directly to an investor, as opposed to the open market).

Paid Promotions

Newsletters, Spam, Advertising- all forms intended to put the company in a positive light, regardless whether the company is worth the paper they are printing new shares on. Paid promo NEVER tells bad things, natch. Also, since they are often paid with free trading (as opposed to restricted) company shares, these new company shares are often dumped quickly, thereby driving the pps down unless enough market demand can soak them up. Excercise extreme caution when interested in an issue you learned about, by way of these forms of media.

False Representation

Volumes could be written on this, as this is the greatest method of selling shares, and often, new shares. Mis-representation occurs by both- company and shareholder.

Companies are famous for outlandish projections, giving investors hopes of great rewards. Usually, it is better to put these companies on the watchlist, as opposed to buying because of projections. 'Show me the money' applies in full.

Shareholders are also famous for misrepresentation, sometimes even, so they can close out on a losing position at a half way decent pps.

This falls under 'pump and dump' (P&D). Many stockboards are loaded with fellow investors who are anxious to see their investments go up in value. Everybody wants you to buy into the same company as themselves. Even I do. Choosing good stocks however, should never be done on the grounds of what people 'say', or what you 'heard' (atleast not until they've proved themselves). Nothing will ever replace DD (due dilligence). It's YOUR money. If you don't invest it wisely, it might end up being MY money.

Short Selling, Naked Short Selling (NSS):

Short selling is done with actual shares that legally exist in certificate. This practise is usually done when a stock is considered overvalued, and a 'short' expects the pps (price per share) to decline. The short is borrowing someone's shares (possibly even yours) at whatever price, from a broker who has such shares, sells them to the market, and after the price has declined, the shorter buys them back (cover's), pays the broker back, and keeps the excess, as profit.

Naked Short Selling (NSS) is done with shares that do NOT exist, in no form whatsoever, and is done only by Market Makers (MMs). This is very comparable to counterfeiting, except without the need to even have printers. Because naked shorted shares do not exist in any form whatsoever, they cannot even be traced by the SEC. It is also a form of dilution, and in the broadest sense, compounded dilution at it's worst, and furthermore, not even on anyone's books.

Naked short selling was created (by the SEC, no less) to allow MMs to 'maintain an orderly market', though it's intention has been ridiculously abused (by MMs) to the point of criminality. Worse yet, due to 'loopholes' in the laws that MMs are able to circumvent, rarely does prosecution/penalties ever occur.

*Note: This is only a brief outline of NSS, as is much of the rest of the information on this board. Nonetheless, all that is discussed here is to bring general awareness to the 'machinery' of the marketplace.

Understanding share structures and market cap:

All publicly traded companies apply for and are given an 'Authorized' amount of shares in which they can use to raise capital.

The shares that a company has issued to date is known as the 'outstanding shares'. All issued shares, whether free-trading, retricted, escrowed, etc., are part of the 'o/s'.

The 'float' is the amount of free trading shares that are 'floating around'.

Restricted shares are not part of the float, but can be, as soon as restrictions come off. Most commonly, restricted shares are issued for 1 yr.

Depending on restrictions, all or part may be tradable after one year. All become free trading after 2 years.

It may do well to know restriction dates and details, as sometimes, when the restriction is lifted, the selling begins, the float grows, and the pps drops (atleast for a short period of time) while the selling is being done.

Preferred shares are usually held by management, and have a conversion rate of xxx amount of common shares for each preffered share.

When investing long term in any company, it will CERTAINLY do well to know all about their restricted and preferred shares, as these can be very comparable to 'monsters hiding in dark places'.

Market Cap is the total o/s multiplied by the current pps.

Example: XYZ company has 10M shares issued and outstanding. Current pps is .112. Market cap is $1.12M.

Market cap is used to determine what value the market (you and I) place on the company and all assets, including patents, rights, logos, branding, etc.

Reverse splits (r/s):

Very rarely are r/s profitable. They are most commonly done by companies that have maxed out their available existing shares of the authorized, yet still need more funds for ongoing operations/lifestyles.

It is advised to VERY selectively invest (Long) in a r/s, as many companies tend to repeat history.

The link below can be instrumental in learning what companies have r/s, and how many times they have.