| As part of your research to find the best penny | | | | is less expensive than raising funds through equity |
| stocks, you may want to find out how the company | | | | since the interest paid on loans is tax deductible |
| plans on raising funds. Every growing business at | | | | versus dividends that are not tax deductible. Penny |
| some point will consider raising funds for its | | | | stocks generally do not issue dividends but they are |
| expansion. The method the company plans on | | | | still better off borrowing money versus issuing shares. |
| pursuing could have a direct effect on the value of | | | | The structure of the loan or note becomes most |
| your shares. | | | | important in the case of default of the loan. In a |
| A company issuing shares for funds will be diluting the | | | | default, the loan can typically be converted to equity. |
| value of the existing or outstanding shares. The new | | | | At this point there will be major dilution of stock |
| shares will diminish the ownership percentage of the | | | | since the debtor receives the money owed to him in |
| shares you may own. If the shares that the | | | | stock. This would only happen in the worst-case |
| company issues are restricted, the dilution will not | | | | scenario where the debtor and company cannot |
| have an effect on the outstanding shares until they | | | | work out an amicable payment plan. In this case, the |
| become free trading. Once they are free trading the | | | | stock would be worth less due to the higher amount |
| holders of those shares will be able to sell them in | | | | of shares. In the reverse scenario when the |
| the open market. So by introducing new shares into | | | | company does perform well and does make its |
| the market the supply is increased. The price will | | | | interest payments, the company is in a better |
| decrease if the demand for the shares is constant | | | | position overall because it does not have to dilute its |
| with the supply. | | | | ownership. |
| One way companies may opt to raise funds is by | | | | It's important to find out what method of fundraising |
| borrowing. They issue a bond or note to a lender in | | | | a penny stock may undertake to raise funds. |
| exchange for the funds. Typically the interest rate | | | | Depending on how the company executes on its |
| for a penny stock will be high due to the high risk | | | | obligations, could play a major role on the value and |
| generally associated with these types of loans. Debt | | | | risk of your investment. |