There is a fine line between having a tight capital structure and one that promotes free trade of a company’s shares. Both have their attractions and their pitfalls.
A tight capital structure means that there are not many shares on issue. If investors are keen to buy your shares and there are not a lot of them around, there is the potential for the share price to increase based on a lack of supply.
This can also be the case where a company has a number of shareholders that are long term holders or ‘sticky’ shareholders. Once again, if there are less freely traded shares available, it has the potential for share price gains in the event of buying interest.
On the flip side, a tight register means that with fewer shares available to freely trade, the number of shares traded is usually lower. If shares are traded infrequently or by a small group of investors, it will be difficult to atttact mainstream investor interest and share price movement.
Another aspect of having lower liquidity due to infrequently traded shares and/or tightly held shares is an effect known in broking circles as a ‘honey pot’. This occurs where shareholders are introduced into the stock through a secondary placement but then find themselves in a situation where there are not enough shares traded for them to easily exit the stock down the track.
As noted at the start, it is a fine balance. Ideally, you don’t want to end up with billions of shares on issue and a share price in the cents that is hard to budge. Similarly, you don’t want to a situation where your share price doesn’t move, even on the back of good news.
For companies with limited liquidity, it is not something that can be simply wished away. It requires a well planned management strategy to rectify and manage for the benefit of all shareholders. Anything else is simply a willing disregard for shareholder value.