Capital's booming penny stocks could bite the dust

Ayman El Saheb of Darahem Financial Brokerage.

Investors should beware buying into Abu Dhabi's booming penny stocks, according to Ayman El Saheb, Darahem Financial Brokerage director of operations.

As detailed opposite, once-dormant equities such as Agthia and Arkan are topping the trading charts day after day to send their prices into the stratosphere, but investors hoping to jump on the bandwagon could be derailed sooner than expected.

"Yesterday's trading confirms what I have been saying for some time, which is that certain traders are targeting illiquid stocks to breathe life into them," said Saheb.

"The danger is that if they can come in that easily, they can exit just as quickly too. The people that bought early are slowly but surely liquidating their positions. Therefore, it's very risky to go into these stocks now, because once the main speculators leave, the stocks will become illiquid again and will leave the rest holding unwanted stock they cannot sell."

Unlike firms listed on major markets such as the London or New York stock exchanges, UAE companies do not have the capacity to appoint market makers to ensure there are always buyers and sellers for their stock.

This means that if no other investors presently want to buy a shareholder's stock they will be stuck with it indefinitely.

This partly explains the often-erratic behaviour of low-traded stocks, which can be static for weeks before moving suddenly making major moves up or down, because investors often have to offer a big price difference to attract a buyer or seller.

Another analyst has called for the ADX to provide more transparency over just who is behind the sudden moves of these low-cap stocks, saying a failure to do so would harm the exchange's creditability in the eyes of potential foreign investors. The ADX was unavailable for comment yesterday.