| This is part 1 of a series: | | | | penny stocks, however, is that they are not |
| Penny stocks, or micro cap stocks, are loosely | | | | regulated. |
| defined as stocks which sell below $5 and have | | | | Thus, you have this problem. Lets say Penny Stock |
| market capitalization of below $50 million. They are | | | | Company X has 20 million shares and $10 million in |
| largely traded on the OTC Bulletin Board and on the | | | | equity (ownership value), which is $.50 a share. |
| Pink Sheets Electronic Quotation Service, which exist | | | | Company X takes a loan from Loaner Y, one of $1.5 |
| primarily for the listing of stocks which cannot be | | | | million. Company X then asks Loaner Y to exchange |
| listed on stock exchanges, such as the NYSE. | | | | this debt for equity (ownership by shares), changing |
| It is the nature of penny stocks that make them | | | | the nature of the loan. The agreement is struck. |
| targets of scam. They are often manipulated and | | | | Company X creates/issues massive amounts of new |
| distorted. However, this by far does not mean you | | | | shares and does not sell them to anyone, only gives |
| cannot make money on microcap stock investments. | | | | them to Loaner Y as compensation. The issuance of |
| It does mean that you must be aware of the scams | | | | new shares to Loaner Y is essential to transfer the |
| and able to identify a manipulated stock (or the | | | | agreed equity percentage-wise. Loaner Y happy to |
| nature of stocks that are most heavily manipulated). | | | | accept because he now owns 60 million/80 million or |
| In this particular review I will examine the commonest | | | | 3/4 or 75% of Company X's stock. This transaction |
| penny stock scams briefly. | | | | results in dilution, or the rapid loss in share value. The |
| The most popular would have to be the pump and | | | | common shareholders (holding the original untouched |
| dump scam, which I will tell more about later. Today | | | | 20 million shares) have lost ownership and thus have |
| we will be looking at stock dilution scams. This is | | | | lost money. Their original equity in Company X of $10 |
| something that is difficult to explain without writing | | | | million is now worth 1/4 of that value, or $2.5 million. |
| volumes, so read carefully. | | | | They have lost (or essentially paid) $7.5 million to |
| Firstly, Dilution is basically when a company spreads | | | | Loaner Y for one little loan =). |
| out ownership of its stock by increasing its volume | | | | Now, the question is: how does this benefit Penny |
| of shares and thus decreasing share value. | | | | Stock Company X? Well, next quarter, Company X |
| Fundamentally, the less ownership you have over a | | | | can take another loan, quadruple the share volume |
| company, the less money value of your ownership. | | | | again, transfer another 3/4 of the stock to Loaner Y |
| So, creation of more new shares generally decreases | | | | as payment, and repeat the process until Loaner Y |
| the degree of ownership which generally decreases | | | | owns all of the stock in question. Company X can |
| the ownership value per share. Less shares = higher | | | | now walk away. |
| value. Adding new shares is a legitimate process, | | | | Meanwhile, Loaner Y can sell the highly diluted, |
| when dealing with stocks with regulated | | | | messed up, low price shares to unsuspecting, |
| dilution-prevention rules ^_^. The problem with many | | | | unaware new investors. |