Have any of your stocks recently tumbled below $5 a share? If you own Citigroup (NYSE: C) stock, then you know that it is among the former blue chips like General Motors Corp. (NYSE: GM) and Ford Motor Co. (NYSE: F) that have breached that $5 limit. They currently trade at $3.88, $2.84, and $1.45 a share respectively. And there's a good chance that if that company has breached $5 a share -- it will drop further.

How so? It turns out that under some circumstances, big institutional investors such as pension funds, endowments, and asset managers must sell a stock when it drops below $5. I have not been able to find out exactly why, however it's likely that these institutional investors owe their shareholders a fiduciary duty to act prudently to protect their investments.

So if there is not enough trouble as a stock approaches $5, institutional selling will make things worse -- and represents an obvious profit opportunity for short sellers. If a stock is dropping fast below $10, for example, a short seller can borrow the stock and sell it short -- which puts further downward pressure on the shares. If it then tumbles below $5, that represents a quick doubling if the short seller can buy back the shares and repay the loan as institutional investors dump the stock.

Continue reading If a stock's below $5, it's likely to dive

If a stock's below $5, it's likely to dive originally appeared on BloggingStocks on Fri, 21 Nov 2008 13:35:00 EST. Please see our terms for use of feeds.