Cornering a market
When the shares of a company are in the hands of a small number of shareholders, the company is regarded as having a high concentration of shareholding. By obtaining sufficient control of the stock, the shareholders can thus corner the market to manipulate the share price up and down.
The Listing Rules require that listed companies maintain a public float of at least 25% to ensure an open and fair market. Some companies controlled by market manipulators may appear to maintain the minimum required public float, but their shares are in fact held by a small number of shareholders. The Securities and Futures Commission, in its High shareholding concentration announcements, alerts the market to those companies with high shareholding concentration. For many of these companies, over 90% of their shares are in actual fact held by ten to twenty shareholders, including the majority shareholders. Therefore in reality, the public float could merely be a few percent only.
When a small group of shareholders controls almost all the shares of a company, the share price can fluctuate substantially even with a small number of shares being traded. In recent years, many placing-only newly-listed GEM companies are often associated with extreme price fluctuations within a short time and exhibit a high shareholding concentration with a small shareholder base.
Cornering ≠ skyrocketing prices
Cornering is one of the paradoxical concepts in the stock market, and does not necessarily mean that share prices will go up. Market manipulators can drum up and drive down share prices. Moreover, companies with high shareholding concentration are easily influenced by the majority shareholders. For example, if the majority shareholder of a company pledges the shares in exchange for loans, and is forced to sell the shares subsequently due to the inability to repay the interest and principal, this may trigger a huge decline in the share price.
The share price and valuation of a company can easily be distorted if the shares are thinly traded. The shares controlled by market manipulators, can move up and down erratically. Therefore, investors should think very carefully whether to invest their money in such companies.
7 November 2017