An investing lesson to heed following the recent Woodbois share-price rise

The Woodbois share price has spiked upwards in recent weeks, and that’s made many of us think about how high it might go. Here’s why I’d be cautious.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A pastel colored growing graph with rising rocket.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If we believe one claim, the Woodbois share price is set to soar by 1,000%. Or is it 2,000%? Yes, that’s what one sharp-eyed The Motley Fool reader spotted last week.

It was a paid ad, in among the top search results on the company name. And it made both predictions at different points. What valuation techniques did the analyst use, and what figures did they offer to back up their bold assertions?

Well, actually, none. There was no real analysis, just the bare claims. “Trust me, I never go wrong, fill your boots.” It was that kind of stuff.

Diverse insights

Anyone offering actual stock recommendations in the UK needs to be properly regulated. And I didn’t need to check if this one is, as the kind of claims they made would never get past a regulator.

And that makes me want to stress an important point about our non-subscription content here at the Motley Fool. In it, we don’t make stock recommendations. Instead, we writers share our personal thoughts on shares in relation to our own investments and our own portfolios.

The Motley Fool approach to investing is based on doing our own thorough research. Part of that is absorbing the thoughts of other investors, for sure. As it says at the bottom of every one of our free articles: “Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.”

But buying on the back of a short article without doing the follow-up research? Well, that could be reckless.

Woodbois share price

But let’s get back to this 1,000% claim. It highlights for me one of the biggest risks with penny shares. It’s the “pump and dump“.

Woodbois has a small number of major shareholders. That means the free float of shares, for private investors to buy and sell, is relatively small. And it makes it possible for someone with less than ideal scruples try to manipulate the Woodbois share price.

The approach is to buy some, and then try to pump it up by making outlandish claims of how it’s about to skyrocket to massive valuations. It then might only need a relatively small number of new investors getting in to push the share price higher.

Then comes the dump, which is just what it sounds. Sell the shares before the bubble bursts.

Penny stocks

Pump and dump really only works with small companies with limited numbers of shares freely trading, usually at penny stock prices. Imagine trying it with, say, BP on a market-cap of more than £80bn and huge numbers of shares traded every day. There’d be no chance.

No, it has to be something small. Ideally the shares will sell for just a few pennies, and there are far fewer daily trades.

So will the Woodbois share price climb further or fall? Or, more importantly, how can we get any idea? For me, it has to be about fundamental valuation, revenues and profits. And I want financial justifications for any predictions I see.

Then it’s a case of doing my own research and forming my own opinion.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Middle-aged black male working at home desk
Investing Articles

Are these top-traded FTSE 100 shares the best to buy for 2024?

The market has disagreed with me pretty much all year on the best buys among FTSE 100 shares. But, are…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

My five favourite forms of passive income

I've been looking for ways to pump up my passive income, so I can retire richer. But which of these…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

What’s the FTSE 100’s best 10% dividend yield?

Depressed prices have thrown up some golden opportunities on the FTSE 100. Which of these 10%-yielding Footsie stocks should I…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

BP shares look dirt cheap

Are BP shares a brilliant bargain? The financials look excellent and it’s hard not to call them anything other than…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

My 12 fears for the stock market in 2024

After a terrific year for global stock markets in 2023, what can I look forward to in 2024? As a…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 income shares for bumper dividends in 2024

I own these two income shares for their outstanding ability to deliver billions of pounds of cash dividends each year…

Read more »

Investing Articles

Could the IAG share price hit £2.11 in 2024?

According to analysts, the IAG share price could be headed for £2.11. But Stephen Wright wonders whether the stock is…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

1 hot UK growth stock I’m buying right now

I've more than doubled my money on this UK growth stock. But with a 948% boost to earnings, I think…

Read more »