Given today's news, we thought it was an opportunistic time to inform you about trading suspensions, how they differ from trading halts and some strategies to avoid investing in companies that might be at risk for suspensions.
Trading Suspensions vs. Trading Halts
Trading Suspensions are NOT the same as Trading Halts. The key difference is how the originate; trading suspensions start at the SEC while trading halts start at either the company (i.e. a news related halt) or the exchange (i.e. a volatility related halt). Also, while most trading suspensions last days, trading halts rarely last more than a few hours, sometimes as little as a few minutes, especially in the case of volatility related halts.
Under federal law (specifically Section 12(k) of the Securities Exchange Act of 1934) the SEC can suspend trading in any security for up to 10 days if the commission deems in necessary to protect investors and the public interest. Subsequently, the commission can take action to revoke the securities' registration if it believes necessary.
Common Causes of Trading Suspensions
A lack of current, accurate or adequate information about the company (i.e. habitually late SEC filings)
SEC concerns regarding the accuracy of information found in company press releases and other public reports
SEC concerns regarding trading activity in the stock, including market manipulation, illegal insider trading and concerns regarding the ability to clear and settle the stock
More on Trading Suspensions
Trading suspensions are intended to protect investors by preventing trading when the commission believes investment decisions are being made either without adequate information or with misleading or inaccurate information. Although not all companies that get suspended are frauds, some are, and suspensions are intended to prevent would-be investors from becoming fraud victims.
Trading suspensions often lead to significant declines in the company's stock price if and when the company resumes trading. The SEC knows this, and therefore only suspends stocks when it feels it is in the public interest and necessary for the protection of investors. Though, this is little consolation if a stock you own gets suspended.
The resumption of trading after SEC suspension can work a few different ways depending on the market where the stock trades.
Stocks that trade on an exchange (including NYSE & NASDAQ listed stocks) resume trading automatically after a suspension.
Stocks that are quoted in the OTC Market (including the Gray Sheets as well as the Pink Sheets, the OTCQB and the OTCQX) don't automatically resume trading after the ten days are up. SEC and FINRA regulations require a broker-dealer to review information about the company (including financial statements, the company's line of business etc.), file Form 211 and have it approved by FINRA before they can solicit quotes or resume quoting the stock.
In the event that there are significant continuing regulatory concerns, FINRA may not approve Form 211. In this case, trading is limited to 'unsolicited orders', meaning brokers aren't allowed to solicit or recommend any transaction in the stock.
Staying out of Trouble
Although investors can never be 100% sure they avoid companies that will get suspended in the future, there are a few things that you can do to better navigate the markets in the hopes of avoiding suspensions and the like.
Do your Homework: We remind people interested in investing in marijuana stocks (or any stocks) to 'do their homework' for a reason. You can find good, bad and yes, even ugly stuff by doing the proper due diligence. A great place to start your homework is our marijuana stock profiles, but know that's not enough to make an investment decision. A great place to continue your research is by reading the company's SEC filings, especially the five outlined here. While reading the SEC filings (and corporate information generally), it is important to be skeptical (if something seems too good to be true, it probably is). Remember one of the reasons for trading suspensions is inaccurate or misleading information released by the company or its affiliates.
Diversify: If you own more than one stock, your portfolio will take less of a hit in the unlikely event that one of the stocks you own gets suspended. This also goes for any of the other 'bads' that could happen in a stock that you own. Spread your investment dollars across many different stocks, or consider an exchange traded fund like Horizons Medical Marijuana Life Sciences ETF (TSX:HMMJ), or the Cambria Marijuana Industry ETF if and when it launches.
We hope this helped you to know what trading suspensions are, know how they differ from trading halts and gave you some strategies to help you avoid getting caught up in a stock that gets suspended. None of this is intended to scare you, but it's important to be mindful that there are risks involved in investing, trading suspensions being one of the bigger ones. Let this be a reminder of the importance of doing your homework and of being diversified as you navigate the exciting world of marijuana stock investing.
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Investing in nanocap, microcap, and small cap stocks is highly speculative. The publishers of DailyMarijuanaObserver.com are not registered as Investment Advisors or Broker-Dealers in any jurisdiction whatsoever. The information contained on DailyMarijuanaObserver.com (“this site”) has been prepared solely for informational purposes. Nothing on the site is an offer or solicitation to buy or sell securities. Investors should seek financial advice regarding the appropriateness of investing in any securities mentioned from their financial advisor.