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Danger: Find out how the third biggest stock on the JSE is heading into penny share territory

by , 06 October 2015

The stock market never fails to impress me.

One day you can feel confident about your chosen investments for your medium to long term portfolio. And the next, you need to make a very big decision whether to buy more or sell the stock for a large loss.

Well, today I want to show you how you shouldn't be fooled by the comfort of top blue stocks.

They can turn sour very quickly.

Investors tricked themselves into buying Glencore for the wrong reasons

Let’s go back a bit. Just so you can understand exactly what happened to this mining giant.

Glencore Xstratra (JSE:GLN) is an enormous company which produces and markets over 90 different commodities. Their three main divisions are:

Division #1: Metals and minerals
Division #2: Energy products
Division #3: Agricultural products

Glencore Xstrata was listed in November 2013 at R55.00 a share. The global market capitalisation was at a staggering R732 billion.
This made Glencore the third largest company listed on the JSE. But this isn’t the only reason countless investors started piling into this

Glecore Xstrata also has a listing on the London Stock Exchange (LSE:GLN). And it was also one of the largest companies on the FTSE100.

And to make things sound even more promising for this investment, Glencore Xstrata also has a listing in Hong Kong.

And so, with this exciting IPO and new potential investment of a dream, investors couldn’t help but buy as many shares as they could. 

How Glencore’s share price dropped 74.15% in just two years!

On the 15 September 2015, Glencore’s share price plummeted 74.18% taking the share price to R14.20. If Glencore even drops another R4.21, it will automatically turn into a penny share.

And remember when I said the market cap was around 732 billion? Today, Glencore’s market cap is only at R286 billion.

There are three main reasons, Glencore’s share price has dropped so much.

First they currently have very high debt. Second there's weak growth in China. And third, commodity prices are extremely low which makes the costs of producing higher than the return. 

Glencore’s downfall has left a bitter mouth in trader’s mouths 
Looking at Glencore’s weekly chart.

You can see since April this year (2015), it’s been a one way down trip to R14.20.

The last candle it made however is a bullish hammer, which can signal the end of the downside.

But why guess? At the end of the day, the company’s fundamentals are very hairy and the overall trend on Glencore is down.

And when this happens you can expect a lot of volatility in the share price.

In fact, you can expect a 5 to 8% rise and crash in a day, type movement. And so, rather leave Glencore alone completely, until we see a huge change in the trend in the next few weeks.

These moves can make you take loss after loss whether you buy or sell the share.

So you’ve now taken over three main points from this article:
  1. Don’t be fooled with the ranking of where the share stands according to market cap
  2. Always look at the micro-information about a company before you invest or trade it
  3. Don’t trade these kinds of shares when the volatility is high, as it can shake you out of the markets where you bank loss after loss.
Always keep in mind,

“Wisdom yields Wealth”
Timon Rossolimos

Senior Editor:  Trading Tips 
Head AnalystRed Hot Storm Trader
Author:           94 Top Trading Lessons of All Time 

PS: Watch our latest interview where we convinced a wealth builder to put some money into trading!
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Danger: Find out how the third biggest stock on the JSE is heading into penny share territory
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