Accessing the NICILytics database gives you crucial information on over 300 – and counting – publicly traded cannabis firms.
Some information, like the concise analyst reports or the 0 through 5 ratings, give an at-a-glance rundown of the companies.
But those are only two of the multitude of data points that make the database one of the most powerful tools available.
That’s why we put together this guide. It gives a walk-through of three other key data points – exchanges, market capitalization, and volume – that are held in the database that you can learn how to use to your advantage.
We’ll run down exactly what these data points are, where to find them in the database, and how to use this information to make the most informed cannabis investing decision possible.
The Importance of Stock Exchanges
At the very surface, an exchange is a marketplace. They host interested buyers looking for sellers – and vice versa.
In the past, exchanges had physical locations where traders would meet up to buy and sell their securities. But this has since evolved with the emergence of electronic exchanges like the Nasdaq and London Stock Exchange.
But outside of being marketplaces, exchanges and the institutions that host them set and enforce rules about trading. All in an effort to create a level playing field between the buyers and sellers participating.
What most people do not know is that specific exchanges have specific requirements for the companies that can list on them.
It’s easy to get bogged down in the details of going through all the various exchanges. So we’d like to focus on the four that we encounter most often: the OTC Markets (OTC), the Toronto Stock Exchange (TSX), the Canadian Stock Exchange (CSE), and the New York Stock Exchange (NYSE).
Cannabis stocks are most commonly traded on the OTC Markets (OTC), the Toronto Stock Exchange (TSX), and the Canadian Stock Exchange (CSE). That’s because the OTC is the least restrictive exchange out there, and the two Canadian exchanges aren’t bound by any government regulations that would prevent them from doing business with cannabis companies.
Listing on Certain Exchanges
The smallest and least restrictive exchange is the OTC market. Short for “Over-The-Counter,” some may argue that the OTC market is not an exchange at all, rather a network of brokers who agree to trade certain shares. Generally speaking, just about any company can list OTC, the only hard and fast requirement is that the company must file with the Securities and Exchange Commission. In turn, this attracts smaller companies to list on this exchange and attracts a smaller audience.
Then we have the two Canadian exchanges. Comparatively, the CSE is smaller than the TSX. The CSE is also less restrictive than the TSX. So generally speaking, larger and more mature companies trade on the TSX, and these companies also enjoy being traded by a larger audience.
Finally, there is the NYSE. It is the largest exchange in the entire world, trading over $20 trillion worth of shares. That said, listing on the NYSE also requires adherence to a strict set of standards. Some standards are based on stock price; for example, the market value of the company’s publicly traded shares must be worth at least $100 million. There are also requirements based on the company’s performance – one such standard is that its total pre-tax income over the past three years must be at least $10 million.
But in exchange for meeting these tough requirements, the companies traded on the NYSE are exposed to the largest audience of investors, both institutional and individual.
The Benefits of a Wider Audience
Having your shares available to a wider pool of investors leads to increased liquidity, or ease with which you can sell shares for cash. For companies, this means they can easily raise more capital by having more interested buyers available to them.
But there are also benefits to individual investors like yourselves. For one, with more sellers out on the market, you can trade more patiently and trust that you can find someone on the other side willing to sell to you at your desired price.
That’s not to say that smaller exchanges don’t also benefit investors. As it stands, the OTC and CSE are some of the few exchanges that allow cannabis stocks to list, providing us with an early opportunity to invest in the sector.
But generally, smaller exchanges are a sort of incubator for small companies. The companies can begin to see an extra flow of capital, and investors stand to gain quite a bit if their investments take off as these companies mature.
Remember an important point: Knowing the differences and benefits of listing on specific exchanges can help you make a more informed investing decision.
Knowing that the NYSE is available to a wide audience and has strict listing requirements tells you that only mature, stable companies trade there. And knowing that the OTC is small with loose requirements tells you it’s inherently riskier, but if the companies you invest in grow, it will all pay off in the end.
What to Know About Volume
Volume is the next vitally important piece of information that is available for every single company found in the database.
And once fully understood, it can help you find the perfect time to make a trade.
Volume is found in the fifth column from the left on the database page.
The numbers you’ll find under this column vary quite a bit. You can see a trading volume of 247,000 for one company, while another could have a trading volume of 1.56 million.
But its meaning is quite simple.
What Is Volume?
Trade volume is the total number of shares of a company traded over a specified period. Sometimes you will run into average volume, which is the average number of shares traded over a certain number of days. But on the database, you’ll only see the daily volume.
There are a couple of important things to keep in mind when looking at volume numbers.
For one, same-day volume numbers are only estimates. It isn’t until the following day that a true measure of a day’s trades can be calculated.
Another is that volume is calculated as the total number of shares that have changed hands over a given period.
Knowing this fundamental bit of information can help you through the next bit of analysis, which will make you a better trader.
How Volume Can Help Individual Investors
Volume can be an important signal when making trades.
There are plenty of different examples to look into, but we’ll just cover the basics for now.
When a stock is making a move, either up or down, a corresponding spike in volume can signal that there is a high amount of investor interest.
For example, if a stock is on the rise and backed by high volume, it shows that investors are enthusiastic to get in. This will ultimately push prices higher until investors are no longer as eager to continue buying at the higher price, which will be seen by a decrease in volume.
Conversely, if there’s a big move on low volume, it shows a lack of interest and can mean there isn’t a larger trend about to follow. It could even mean an entire reversal is coming.
These different signals can all be used to your advantage.
If you’re looking to exit a position and you see the stock’s price increasing with high volume, it may be your signal to sell. This is because you know there is a lot of interest in this price move and you’ll likely be able to find an interested buyer at a higher price.
Now, the above details aren’t the only signals that volume can give you, but they are some of the simplest. And knowing these intricate details of how the market operates can help you with your trading a lot of the time.
So can pairing your knowledge of exchanges with this new understanding of volume.
The Connection Between Stock Exchanges and Volume
Larger exchanges provide companies with a wider pool of investors.
Well, with more investors comes more volume. That’s why you will see higher volume numbers for companies trading on the New York Stock Exchange than on the OTC markets.
And the same lesson applies.
When trading on a larger exchange and having a higher volume, individual investors are more likely to find buyers and sellers at their specific price, helping you start at a more favorable position.
But to take it a step further, higher volume can provide investors with a bit of a safety blanket from increased volatility (drastic price swings). As a stock’s volume increases, so does its liquidity, which is the ease at which a stock can transfer between buyers and sellers.
With increased liquidity, a stock’s price is more resistant to buying and selling, making price swings less common, thus reducing volatility.
Though, risk-seeking investors may opt to trade stocks with lower volumes and try to rake in higher returns from the increased volatility that comes with it.
There is a lot that can be learned from paying attention to volume. It is a powerful entry and exit signal, and that’s only scratching the surface of its power!
When paired with other info in the database – such as exchanges – it tells an even greater story.
The next section covers the vital metric that is a company’s value.
In this entry, you’ll learn about another useful point of data available for every company in the NICILytics database: market capitalization.
You’ll find this number in the column labeled “MKT VAL” on the database page.
The term “market capitalization” is used interchangeably with other terms like “market” or “market value,” but they are all referring to the same metric.
Here’s what it means.
What Is Market Capitalization?
By definition, market capitalization is the cumulative value of all a company’s outstanding shares.
It’s calculated by taking a company’s stock price and multiplying it by the number of outstanding shares the company has issued.
For example, if Company A has one million shares outstanding and is trading at $200 per share, its market cap is $200 million.
In practice, a company’s market capitalization is constantly changing. Stock prices constantly fluctuate, and a company may issue shares to raise funds.
We also want to note that market cap does not necessarily measure a company’s value; only due diligence and an analysis of a company’s fundamentals can help you come to that conclusion.
Market cap will, however, tell you what the market is willing to pay for a company. This, in turn, will give you an idea of the company’s relative size.
And that is how you can use the metric to your advantage.
Determining Risk and Reward Through Market Cap
As you scroll through the database looking at the market cap column, you’re sure to see values ranging from as high as $100 billion to as low as a few million dollars.
It’s not totally intuitive, but, as the market cap of a company gets higher, the risk associated with investing in the company decreases.
Think about it like this…
The companies with the largest market caps have typically been around for a long time. They’ve become the top competitors in the longest-standing industries. You’re less likely to see violent price swings in the short term, and these companies are more likely to withstand an economic slowdown. Many of these companies also pay dividends.
These companies are classified as “large-cap stocks” and have a market cap of over $10 billion.
As market cap decreases, companies become classified as “mid-cap stocks.”
When the cap is between $2 billion and $10 billion, it’s a “small-cap stock,” and a value under $300 million is a “micro-cap stock.”
The smaller a company gets, the fewer resources it has. It can serve fewer and smaller markets.
But the companies – like cannabis firms – are often serving rapidly emerging industries.
And with a smaller market cap comes higher risk but also the potential for a much larger reward.
The small-cap company you invest in today may become the large-cap company of the future. But an economic downturn could leave the company, and your investment, worthless.
And that’s how market cap should play into your investing decisions.
Would you rather buy a company that is worth $10 billion or more, getting quarterly dividends and small, but consistent, returns?
Or would you rather invest in a smaller company that’s positioning itself in an explosive market filled with competitors that might just make it big, bringing you along for the ride?
Well, we’ll let you in on a little secret…
The smartest investors will have a healthy mix of both.
The NICILytics Advantage
Bring your attention back to the formula for market cap – share price multiplied by shares outstanding.
By utilizing NICILytics, you have a distinct leg up on other investors who rely on other stock screening services.
That’s because every other service is calculating their cannabis company market caps incorrectly.
At NICI, we make sure to calculate the fully diluted shares outstanding. With a fully diluted share count, we’re taking all possible convertible securities into account.
And that’s essential in the cannabis industry.
Due to companies not being able to properly raise money, many financing rounds include convertible securities – like warrants – on top of all the shares being issued.
Warrants are basically a promise that allows the holder to buy a share at a specified price, similar to an option. Many times, cannabis companies have millions of warrants outstanding, all of which will eventually become outstanding shares.
Seeing as shares outstanding are an intricate part of calculating market cap, we think it’s imperative to include all of these convertibles in our market cap calculations. It’s the only way to get the true picture of a cannabis company’s size.
Keep that in mind when you find yourself looking at financial data outside of NICILytics.
Right off the bat, market cap can help you determine whether a company can serve you as an investment.
If you’re more risk averse, you may want to stay away from smaller-cap companies. If small, consistent growth isn’t your game, then you’re probably looking for smaller companies or mid-cap companies.
Most importantly, we want you to remember that we have the most accurate measure of market capitalization of any stock screening service available. Only here can you find a fully diluted market capitalization that takes all those hidden shares into account.
This way, you’ll be working with the full story when making your cannabis investing decisions.
This guide shines light on just three key metrics that the NICILytics database provides to cannabis investors.
With exchange information, volume numbers, and market cap calculations on over 300 cannabis firms, you have an excellent start at making your next cannabis investment.
We’ll talk again soon.
6 responses to “The NICILytics Training Guide”
August 27 2020