The collapse of Lake Resources and poor performance of BrainChip and Imugene shows why there’s no place for penny stocks in a serious sharemarket index.
www.afr.com
I want to see this Tom Richardson cry ... the latest 2025, preferably now!
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It’s time to ban penny stocks from Australia’s flagship share index
If you want to attract and win the trust of serious overseas investors including sovereign wealth funds, pension funds, and asset managers you don’t want a flagship index pockmarked by penny stocks.
Tom Richardson Journalist
Jun 26, 2023 – 11.00am
Penny stocks are rearing their ugly heads on Australia’s flagship S&P/ASX 200 Index with alarming regularity, in a reflection of the market’s
deteriorating quality, as the ASX shrinks for the first time in 18 years.
Last week, Australia’s flagship index resembled a penny stock casino,
with shares in lithium explorer Lake Resources crashing 38 per cent to 29.5¢ after it revealed a six-year delay to its Argentinian lithium project. Speculative biotech Imugene finished the week at just 8.9¢, with tech hopeful BrainChip losing 13.8 per cent over the week to 34.5¢.
The benchmark S&P/ASX 200 index now has multiple stocks trading below $1 as the market shrinks for the first time in 18 years. iStock
The performance across what is supposed to be an index of blue-chip businesses is a growing problem, given passive index tracking funds mean almost every Australian has some financial interest in the success of the S&P/ASX 200.
Moreover, BrainChip, Imugene, and Lake Resources share common traits of unproven business models, virtually no revenue, heavy share selling by insiders, and penny stock prices that equal daily volatility.
All this hasn’t excluded them from benchmark membership, although other jurisdictions would have no truck with this nonsense.
RELATED QUOTES
ASXASX Limited
$67.160 -0.06%
1 year1 day
Updated: Feb 12, 2024 – 8.22pm. Data is 20 mins delayed.
View ASX related articles
IMUImugene Limited
$0.110 4.76%
BRNBrainchip Holdings
$0.260 15.56%
LKELake Resources
$0.091 -3.19%
Poor returns
In the US, penny stocks – defined as those that trade below $US1 – are banned for good reason. They’re viewed as ripe for manipulation. A 10¢ stock only needs 10 bids higher to 20¢ to soar 100 per cent and double a manipulator’s money.
By comparison 10 bids higher on a $20 stock to $20.10 will only add 0.5 per cent, which shows why penny stocks are attractive to those seeking to get rich quick, illicitly.
In the age of anonymous social media and online chatrooms, it’s easy for an organised group to create false hype around a business and use multiple trading accounts to sell the stock to themselves at incrementally higher prices in a bid to inflate valuations.
The hundreds of millions of dollars of easy profits on offer mean penny stocks are regularly targeted by promoters. The US regulator, the SEC, charged 16 defendants last year after it said it uncovered a multi-year fraudulent penny stock scheme that generated more than $US194 million ($290 million) in illegal profits.
Last September,
The Australian Financial Review revealed Telegram pump-and-dump groups actively targeted penny stocks like Australasian Gold, which had a low number of shares on issue,
relatively large amount held by top-20 shareholders, and a price-sensitive announcement in the market to evade trading halts from suspicious regulators.
There’s no suggestion Imugene has been targeted by manipulators, but it currently has a massive 6.42 billion shares on issue to equal a $571 million market cap at 8.9¢. In other words, it could add or lose a $1 billion in value with just a 16¢-share price move.
The cancer research group has no potential treatments in the Phase III clinical trial phase, but joined Standard & Poor’s’ index of Australia’s top 200 companies in December 2021 and has cratered more than 80 per cent since.
Lake Resources entered the S&P/ASX 200 Index in June 2022 and its shares have also plunged more than 80 per cent since.
As a corollary, if you want to attract and win the trust of serious overseas investors – including sovereign wealth funds, pension funds, and asset managers – you don’t want a flagship index pockmarked by penny stocks.
The UK’s regulatory environment forces around 850 smaller, speculative companies to list on its Alternative Investment Market to ringfence the integrity and attractiveness of its benchmark FTSE 100 Index. It makes sense to separate out speculative businesses from real businesses to protect investors, while still helping small companies attract capital.
Elsewhere, Australia’s rival for Asia-Pacific capital markets, Singapore, built its economy on tough financial services regulation that gave international investors confidence in its markets and a competitive advantage over dozens of regional competitors. The island state teems with international law firms, hedge funds, and asset managers precisely because sound regulation attracts capital and brings jobs.
Today, a business can list on the ASX with a minimum market cap of just $15 million, with inclusion in the S&P/ASX 200 based on minimum free floats, market cap, and trading volumes.
As a starting point, the S&P/ASX 200 should exclude businesses that have zero revenue and stock prices under $1 to protect index buyers and other market participants.
brainchip.com
? That's funny because we hardly swear especially compared to the Australian, American, or British.
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