
In a jaw-dropping revelation shaking Wall Street to its core, a record-breaking 557 stocks on U.S. exchanges have nosedived below the $1 mark, sparking a wildfire of concerns over Nasdaq’s credibility and the fate of these teetering companies.
The Nasdaq Stock Market, once a bastion of high-flying stocks, is now swamped with these sub-dollar shares, primarily belonging to risky small companies that experts argue should be relegated to the murky waters of the over-the-counter market, not rubbing shoulders with the likes of Apple and Microsoft.
The skyrocketing number of these penny stocks, up from a mere dozen in early 2021, has set off alarms among investor-protection advocates.
They’re sounding the siren that this unprecedented pileup, mostly on Nasdaq, is eroding the very fabric of market integrity. “Exchanges are supposed to be gatekeepers,” says Rick Fleming, a former SEC investor advocate, pointing out the dire need for Nasdaq to uphold its standards and not let these sub-$1 stocks undermine its reputation.
The backdrop of this financial frenzy?
The 2020-2021 IPO and SPAC deal boom, has now fizzled out, leaving many of these companies’ shares languishing in penny stock territory.
With 583 companies currently flouting Nasdaq’s listing rules, including heavy hitters like AEye, a self-driving car sensor maker whose shares plummeted to a mere 15 cents, the situation has reached a tipping point.
But here’s where it gets tricky: instead of facing delisting, these companies are performing financial acrobatics to cling to their Nasdaq listings.
Enter the reverse stock split strategy, a desperate move to artificially inflate share prices back over $1.
This year alone has seen a staggering 255 reverse splits, a sharp rise from 159 last year, as companies scramble to meet Nasdaq’s standards.
However, in a twist of fate, some of these sub-dollar stocks are becoming the darlings of individual investors, lured by social media buzz.
Take Inpixon, a location software maker, whose stocks saw a day of frenzied trading, soaring to volumes 300 times the norm.
Yet, despite these brief spikes, many companies like Inpixon are still languishing at rock-bottom prices, closing at a paltry 7 cents a share.
This precarious situation raises a crucial question about Nasdaq’s minimum $1 share price rule, in place since the 1990s but suspended during market crashes.
The NYSE faces a similar challenge but on a much smaller scale, owing to its fewer small-cap companies.
S. Ghon Rhee, a finance professor, warns that non-compliant stocks falling below $1 are extremely vulnerable to catastrophic losses, potentially wiping out entire investments.
As the stock market reels from this unprecedented scenario, the burning question remains: What should Nasdaq do about the companies whose stocks have fallen below $1?
With market integrity hanging in the balance, the fate of these penny stocks could reshape the landscape of U.S. stock exchanges forever.