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Penny Stocks and The Nature of The Penny Stock Market |
First let me tell you that neither I nor anyone else that doesn’t have inside information is an expert in the markets. Some folks are better in the markets than others of course.
Almost everybody playing pennies refers to themselves as investors but in reality, anybody playing the penny markets is speculating at best, outright gambling most of the time and frequently simply rolling the dice on a one-shot grab at the gold ring.
It’s a little better with stocks on the OTCBB than the pinks, but both are very risky, because OTCBB stocks and even less so the pinks, aren’t required to file much information.
It is accurate to say there’s no chance of getting rich off blue chips, not on one roll of the dice. The stocks are too pricey and seldom move much. Penny stocks have therefore always been a haven for folks wanting to hit it rich on a small investment and con men, taking advantage of people’s greed.
It’s true that for a comparatively small amount of cash, you can conceivably hit the big time and make several million dollars off a penny stock. There is that chance but it’s so infinitesimal, it’s about the same as hitting a lottery.
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 A Shell Stock (Shell Company) is a public company that no longer has any business operations. It retains its capital structure and public trading status with the intention to complete a reverse merger with a non-public company with an on-going business. This merger creates a new company that is both publicly trading and generating revenues. There are many reasons why a Shell Stock exists in the first place, but most commonly they either lost the business due to a bankruptcy, or just sold or closed it.
The SEC (Securities and Exchange Commission), in Rule 12b-2, defines a "Shell Company" as "a registrant with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets." Previously, the SEC referred to a Shell Company as a Blank Check Company.
Why would a private company with an on-going business want to reverse merge into a Shell Stock? The goal of the private company is to become a public company. There are many benefits in becoming a public company. The traditional method of becoming a public company, via an IPO (Initial Public Offering) can be very expensive and time consuming. Becoming public via a reverse merger is less expensive and much quicker.
Types of Shell Stocks
Public traded stocks generally fall into one of two categories. Either they report to the SEC or they do not.
Reporting: Required to file periodic Quarterly and audited Annual financials with the SEC. They also report changes in stock ownership and any material changes in the company's structure.
Non-Reporting: Forgo any reporting to the SEC.
When comparing a Reporting Shell Stock to a Non-Reporting Shell Stock, keep in mind that with a Reporting Shell Stock, you can visit the SEC website and review detailed audited financial and stock owner information. With a Non-Reporting Shell Stock, you can only rely on what the company chooses to report.
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Advice For Playing Penny Stock Market |
First, never play the penny markets with money you can’t afford to lose, funds you’re saving for your kid’s college fund, or cash needed for the house payment next month for example. Be prepared to lose every cent you put into the penny market.
You’d be surprised how many people risk money they can’t afford to lose, figuring they can beat the market in a few weeks or months and put the money back they took out of the college fund, etc.
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Newbies In the Penny Market |
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It is a fact that newbies, people first entering the penny market, do not know what they are doing. Not only are they inexperienced but often time worse, they are incredibly naive and trusting, and don’t believe or understand there are people in the markets that will take all their money, their house, car and everything else if they can.
There are four tough lessons for a newbie in the markets to learn. They are:
1. Do not take anything you hear or read at face value
2. Cut your losses, no matter how painful it may be
3. Never fall in love with a stock
4. Always make your own buy and sell decisions.
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Penny Stocks