Thoughts and Observations of a Minister

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Sunday, January 27, 2008

Change the laws that govern our market

Can the US stock market be cleaned, can it restore the confidence needed to bring a vibrant market to earnest investors.
A good market is built on rewarding companies that are successful, Rewarding investors that placed they earning in those companies.
There is a old saying build a better mouse trap and the world will beat a path to your door.
That is true of a private company, where the owner has complete control over earnings and expenditures. A private company knows its worth. If you sell a private company, how would you set a price, 2 1/2 times the gross income, 3 times the net. That would be entirely up to the seller, the owner seller has absolute control.
In a public company it is different. If you own stock in a private company, and you do not want to sell, and say no one that owns shares in the company wants to sell. Then you would think as the demand for your company goes up so would the price per share.
It isn't like that in the public market, see a broker can sell your shares to someone else, just by borrowing your shares. What if you do not want to loan them, no problem, he can borrow them and sell them anyway. That alone will devalue your ownership by 50%. They call that making a market.
I call it making up a market. Selling something they do not own, so they can make commissions on a sale. The price goes down, you can not take that much loss, so your sell. The reason you sold for a loss was because someone without your permission, already had sold your shares.
Then there is the selling of shares you don't own. The short selling adds even more shares to the market, yet no one has sold, this is all buying, you buying first, then the market maker selling your shares they borrowed without you knowing, or approving, the short sellers see the price going down, and they jump in. They have no investment in the company and the own no shares, they sell with a promise to buy at some future time. The price continues to go down, and it picks up speed.
The snowball rolls so fast that the short sellers, continue to sell, they may sell as many as 20 time the amount of total shares in the company. The company fails. Those who have shorted never need to buy anything, the company has failed, those who invested lost all, to those who never invested, but just sold with a promise to invest later.

Let's do some math.

Company A, has 1000 shares for sale. 500 preferred shares not for sale.
you and a few friends buy 1000 shares, yep you own it all. $1 a share.

The company does well, more people want to buy, but you do not want to sell.
The price per share goes to $2, then $3, then $4 you still do not want to sell.

The market maker sells anyway, he doesn't need your approval, he just borrowed your shares.
Now he sells 1000 share that you own, for $4 a share to me.
You did not sell, so you get no money, where does the $4000 go? good question. The answer to that is why they borrow your shares, and help destroy your company.

It get even worse. The price drops to $3 because the number of shares have doubled.
That attracts Short sellers, now they do not own anything, but they can sell shares in your company, after all, there needs to be a market, a unfair, a unethical, and a totally manipulated market. The short sellers sell 2 thousand shares, the price goes down even further to $2 a share, as long as it goes down the short Sellers sell. Why not, they get the money and have not invested anything in your company.
That attracts another group, they see that the company is falling fast, so they sell short as long as anyone is buying they are selling. They may sell as much at 20,000 shares. How can they do that, there never was more than 1,000 shares and they were not for sale. no mater it is called making a market. The key is to drive the company into receivership and share prices into sup penny, yes sub-penny. now the parts per share is $.0001 and they buy all they shares they sold for $4,$3,$2, $1,$.50,$.10,$.01$.001, they buy all 21,000 share back.

Most investors would love to buy something for $.0001 and sell for $4, but that is almost impossible, but selling for dollars and buying for pennies, is going on unchecked in our market every day.
One more point, what if you still do not sell you 1000, and the other investor, that would be me, that paid $4 did not sell, then they would fail to deliver, and someone would be in trouble.
First of all the failure to deliver laws as seldom enforced, and when they are it is always too late.
Just in case there is a problem, the off shore hedge funds the usually naked short a company out of business, cut a deal with the owner of the 500 preferred shares, and in the fine print you will see that preferred shares can be converted to common shares, at the rate to 1000 to 1.
Now you have plenty enough to knock out any real investors.
The problem is most of this is looked on as legal in our market. The US market is not designed to build companies, it is designed to destroy the investors, and in so doing destroying the company.
The laws we have need to be governed by ethics, a law with not ethical enforcement is not a law at all it is just a license to rob.
We need some real changes, or our market is lost, people are catching on, and the investment dollars will soon dry up. and there will be no one left to rob.

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