3 days since the article of 'Penny Stock In Red - Down and Hurt' published, we received some questions from our members on how it works? Why is it so? This article is a follow up information to share for educational purpose. There is no real company and no real case in this posting.
Reason to choose a penny stock for speculation purpose:
1. Market Capitalization is small normally below 100m.
2. Easy to control as the shareholders are in small group and limited
3. Putting a little margin with broking house entitle you to get a higher multiple limit
4. Companies that are not making money/accumulated losses is high.
What are the criteria to fit in this Game Plan?
1. The stock must be non liquid.
2. Common understanding on not to sell during uptrend till the project is done.
3.Basically the project lasted for 1 to 3 months.
(why the project must stop at sometime near future? they can't always be paying brokerages till it eats up the margin).
4. All projects must come with an exit plan.
Why needs to increase the price? The main objective is not to give angpau to traders out there.
Here are the reasons ordinary people unaware of. An example of a targeted case study details are as below (no real company and no real case - only example):
Mother Price: 0.05
Par Value: 0.10
Normal Corporate Exercise
With the current scenario above to raise cash, definitely private placement or issuance of bond is not likely. The group is not able to issue bond/place out shares below par value of the company. Mother price at 0.05, Par value 0.10. Issuing placement at 0.10 will not be making any sense as no one will take the placement of shares.
They need money but can't raise funds. So what do they do? They will work hard to get more projects / awards / contracts / Joint Ventures so that it creates a good market news flow for the company. People will start to follow the company. If they gets the project/ upcoming project to be awarded, price will goes up fast. That is where you always see when the price go up, it will always follow by Corporate Exercise (right issue / placement of shares / bond issuance).
Mother Price: 0.05
Par Value: 0.10
Increase to 0.20 (4x of the initial mother price - Now they are fit for Corporate Exercise)
Here we can see another issue, from 0.05 to 0.20, the price has gone up 4x, Some people are not comfortable to pay high price for exercising the right issue of the shares. How to entice people to accept the VWAP (Volume Weighted Average Price)? Even if the good companies get the new projects / awards / JVs , some people might still think that it is expensive to buy.
Simple: It comes with the free warrants and people will feel good about it, so they will accept the deal. Assuming Rights issue 1 to 1, exercise price of warrant 0.10. You still have to pay 0.10 to convert the warrant become mother shares 5 years later.
That is corporate exercise.
What about the bad ones (not corporate exercise)? For group that normally engage in this activities they need to fulfill an AGENDA/OBJECTIVE. Jack up the price, spread the news out there will be new projects / new shareholders / new asset injection but after sometime, things just died off. Worse part, nothing happen just the price increase. You will be able to notice a lot of those cyber troopers sending good feeling messages at major investment blogs or forum asking you to buy. Give you a high Target Price.
Yeah, you are so lucky, you found the DEAL OF THE YEAR. In this case study, the company NTA is around 0.05, the price has gone up to 4X (without any new projects / awards / contracts) and the bosses are so nice, in love with their company thus unwilling to sell their portion to you even tough it has been making losses for the past 5 years with huge accumulated losses.
Do you know how many good / big / profitable companies listed in Bursa are trading below NTA and P/BV <1? And this stock you are trading can assure they can make more good money? Before you know, it has reach their targeted price, the distribution of shares will kicks in. And yet, there is no good news, awards or anything. It is merely shares accumulation at low and distribution at high. Get caught again? History does repeat.
Disclaimer and Declaration
The full content of the article is for educational purposes only and should not be used as investment recommendations. We are not responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss. Examples of specific shares is citied for illustration purposes.