Joined: Aug 28, 2013
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November 20th, 2015 at 5:20:01 PM permalink
Milken and company used to deal with penny stocks. The man ended up in jail. These penny stocks seem to be crook's heaven.
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November 20th, 2015 at 6:26:22 PM permalink
Isn't this similar to what happened in the Wolf on Walstreet. They get the number of shares up so technically the company is worth more, then stock goes up slightly and the big owner dumps their shares. Something like the Steve Madden incident

Is it bad that my references come from movies?
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November 20th, 2015 at 6:46:44 PM permalink
I posted in an earlier topic about Robert Brennan and his First Jersey Securities company in the 80's. I was a young kid looking to make a quick fortune and was an easy mark. Was a victim of multiple pump and dumps and learned quickly. Luckily someone introduced me to Vanguard and their original Windsor fund and I have stayed away from micro caps ever since.
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November 20th, 2015 at 7:22:58 PM permalink
Yeah, this sort of thing happens all the time.

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.
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November 21st, 2015 at 1:14:24 AM permalink

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.
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November 21st, 2015 at 2:32:42 AM permalink
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.
It's not whether you win or lose; it's whether or not you had a good bet.
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November 21st, 2015 at 5:40:46 AM permalink
Quote: Wizard

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".
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November 21st, 2015 at 5:49:21 AM permalink
I could see not getting angry about it if I was an investor who owned shares worth tens of dollars or more, that had collapsed into penny stocks. At that point, it might be that the only maneuver left is putting more shares out there to sell, hoping the money raised saves the whole enterprise.
the next time Dame Fortune toys with your heart, your soul and your wallet, raise your glass and praise her thus: “Thanks for nothing, you cold-hearted, evil, damnable, nefarious, low-life, malicious monster from Hell!” She is, after all, stone deaf. ... Arnold Snyder
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November 21st, 2015 at 8:11:22 AM permalink
Berkshire Hathaway common stock only has 811,000 shares outstanding and each share currently sells for $204,600.

I guess that is not considered a penny stock.

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November 21st, 2015 at 8:31:43 AM permalink
I lived in Denver in the 70's. Buddy had a brother who was a broker in penny stocks. What a con job. Friends and family could buy stock at initial offer, then dump same day or next. Anything with the word SOLAR was a guaranteed winner. Raised several hundred thousand overnight on one stock who's only assets were a college professor and several cans of black paint.

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