THE BASICS OF INVESTING WITH RYAN JAMES: PRICE FLUCTUATIONS

By Ryan James

Market Movements and Momentum

Price fluctuations control the value of securities. These events occur in the overall, broader, or specific markets, sectors or industries, and individual securities. Numerous terms characterize significant movements.

SPACs

A Special Purpose Acquisition Company, or a blank check company, is a publicly traded corporation with the sole purpose of taking private companies public. The process happens by a SPAC going public via a traditional initial public offering (IPO); this is how they raise money. Investors can trade the stock on speculation of a merger and acquisition (M&A) with a privately held corporation. Eventually, the structure of the SPAC phases out, and the security represents the newly public company. The company may even change the ticker of the asset. Companies may decide to go public via direct listing or SPAC mergers instead of a traditional IPO. The reasoning is that IPOs are long, arduous processes that require fees and collaboration with the bank (an underwriter) and cooperation with the SEC. A special purpose acquisition company will become a publicly traded company via IPO. It then searches for a private entity to take it over. This new company will forego an initial public offering because of its merger with an already public company. It is a more expeditious process that does not require an underwriter for the newly public company.

“The SPAC market has taken a real beating.” — Chamath Palihapitiya

What Causes Price Movements

Price movements have varying causes that can differ depending on broadness, i.e., the Dow’s oscillations are likely unrelated to those of a stock.

Smaller Markets – Volatility and volume primarily incite these movements. Recall that volume is the number of shares bought and sold. If a stock becomes oversold, then its price will likely decrease. If it is overbought, then its value will likely increase. A high volume will carry substantial percentage changes in any case. Groundbreaking news of a company causes investors to buy or sell, generating significant alterations in volume. Stocks are majorly affected by their performance, so events such as earnings reports are crucial. Individual stocks are also affected by the broader market, so considerable variations in indexes or regional, national, or continental markets will influence stocks.
Broader Markets – News can also affect broader markets, but this tends to be more influential and unrelated to a singular company. An example of this would be a press conference with the Chair of the Federal Reserve or Secretary of the Treasury; they may encourage economic prosperity or ease investors’ concerns. A country’s stocks may fall if the state experiences some form of turmoil. For example, the United Kingdom of Great Britain and Northern Ireland’s economy suffered during Brexit, along with the British pound sterling, the country’s currency. Markets can experience change on hopes, concerns, or imperative changes.

Terms for Price Movements

Rallies, corrections, dips, tops, bottoms, and range – During a rally, or market rally, is when an aforementioned category (see “Market Movements and Momentum” above) a security continuously increases in value over a given time; it may result in a correction, also referred to as a market correction. It is when a stock loses value over a given time. These periods are most commonly trading days or weeks. A rally one trading day may lead to a slight correction the next, or vice versa. A dip is a temporary, short-term decrease in stock price; they are an excellent time to purchase stock, but it may be difficult to correctly time the market. A top is the inverse of a dip; it is an opportune time to sell shares. The range is the difference between the high and low points of a security during a specific duration.

Direct Listing: An Alternative to SPACs and IPOs

What is a direct listing? It is a method of going public that is seldom used relative to IPOs but is far more prevalent than SPAC mergers. Like companies using special purpose acquisition companies, those using direct listings do not require an underwriter. Companies bypass investment banks that would purchase shares pre-IPO. It would determine the opening price to the public, typically raising money for the company via increased share prices and market capitalization. The free market determines the opening price; subsequently, individuals can decide whether to drive it up, tending to lead to a more volatile opening and less money raised for the company. Coinbase (NASDAQ: COIN), a cryptocurrency-trading company, and Squarespace, a website-building tool, are instances of direct listings. Coinbase has filed at $250, and Squarespace will soon go public.

Major SPACs and Their Private Entities

Pan-European Hotel Acquisition Company N.V. began the trend in 2007 as the first SPAC; it listed on the Euronext Amsterdam exchange.
Diamond Eagle Acquisition merged with online sports-betting platform DraftKings (NASDAQ: DKNG).
Bowx Acquisition Corp (NASDAQ: BOWX) will soon take WeWork, a commercial office space real estate company, public under the ticker (NASDAQ: WE).
Mudrick Capital Acquisition Corporation II (NASDAQ: MUDS) will soon take trading card company Topps public under the ticker (NASDAQ: TOPP).
Lucid Motors will go public via a merger with Churchill Capital Corp IV (NYSE: CCIV).
Aerospace company Virgin Galactic Holdings Inc (NYSE: SPCE) went public by merging with a SPAC.

Celebrity SPACs

Many notable athletes and entertainers, such as Shaquille O’Neal, Colin Kaepernick, and Alex Rodriguez, have gotten into the SPAC craze. Because of increased mania involving celebrities, these specific SPACs are far riskier than average blank check firms. The SEC advises, “Celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors.”

Summary and Bottom Line

We ventured into the topics of market movements and their causes. We also mentioned SPACs. Understanding price fluctuations is essential for picking the right stocks and comprehension of a portfolio and the stock market. SPACs are a currently popular topic that has changed the means of going public. The next issue will focus on government agencies and shareholder voting rights.

Disclosure: All statements and opinions expressed in this article are objective and my own. I am not a financial advisor. I do not recommend the trade or use of any particular stocks or services. I acknowledge the risks of investing.