Is it bad that my references come from movies?
They issue stock to raise money. If they are careful with how much they issue, they won't hurt their stock price much. For some companies in high demand, it is almost like a second IPO, with people clammoring to get a piece and the stock price actually rises.
They will also buy back stock in an attempt to raise the stock prices and increase "shareholder value" this can also make investors happy and also increase the price of the stock from that.
While they don't see any money from that kind of move, and really it costs them some cash flow to buy the stock back, it can help "the numbers" which affect your bond rating and how much it costs you to borrow money.
So basically it is to get money and to manipulate the stock price, whichever is more advantageous to them at the time.
Companies issue shares to raise capital to fund their operations. Equity is much cheaper than debt, especially for a microcap company that no one would want to lend to. That said, penny stocks tend to issue a ton of shares because their stock price is so low. A billion shares sounds a lot, but if it trades for for less than 1/10th of a penny, we talking about a mkt cap of a million.
Most penny stocks are she'll companies. Much like most boiler rooms, they have an address, no real employees or customers, utilize boiler room brokers to push their stock price around. Rarely is their real liquidity in the name. When you try to sell with a limit order, it barely executes because a mkt maker will at times voluntarily choose not to execute.
The next part of the typical scam is to hire some famous person to vouch for the company, pump up the price while the smart money gets out, and then either do a reverse split or fail.
God bless capitalism.
Thanks for the above. What I'm wondering now is even if a company were inclined to keep diluting the stock to raise capital, why doesn't it also keep doing reverse splits to keep the stock price looking legitimate. I thought to get off the "pink sheets" the price had to be at least $1.
The exchanges also have a minimum market cap requirement, so a $10m market cap company with a $10 stock price would still be on the "pink sheets".