Penny stocks follow a repetitive cycle of boom and bust.
It’s the reason I teach traders not to become true believers in whatever hype these companies are trying to sell…
If you’ve ever made the mistake of drinking the Kool-Aid — you’ll want to dive into the penny stock lifecycle with me today.
When you understand it, you can navigate this treacherous terrain with greater confidence and awareness…
And gain a strategic advantage in your trading.
Discover how these stocks operate so you can make more informed decisions, mitigate risks, and potentially capitalize on opportunities that others miss…
Unlocking the Penny Stock Lifecycle: A Deep Dive
Why do penny stocks have volatile moves that cause them to skyrocket one day and crash the next?
Because they follow a predictable pattern and lifecycle. To understand it, you need to know one thing.
Penny stock companies are in business to sell shares. Think about it…
How do they pay their employees? How do they pay their rent? How do they stay in business?
These companies have no income or revenue. They make money by selling stock.
But before anyone will buy the stock, they need to make the company look good. So they pump it up…
The Pump Up
Every time a crappy penny stock company puts out a press release, it’s trying to pump its stock.
The company drops announcements hyping itself up with promises of revolutionary products or groundbreaking technologies. But most of these companies don’t actually make any money.
So, what’s their game plan?
Simple — they pump themselves up, creating buzz and excitement around their stock. Then, they create more shares of the company and sell them to institutions or private investors for less than the current market value.
Once the private investor has their hands on shares that they paid less than market value for — of course they’re going to sell them into the market and make a profit.
That makes the stock tank from selling pressure. But that’s not even the worst thing about it…
The creation of new shares also dilutes the value of existing shares. Because now the company’s value is spread out among more shares.
That creates a different problem for the company…
The Float Factor
Now that the penny stock company has diluted its shares, the float is larger. Float is the total number of shares available for trading.
And guess what?
Once the float gets too big, the party’s over.
The stock isn’t going to have volatile moves like a low-float stock. It needs more volume to move it upwards.
It’s like trying to inflate a balloon with a hole in it.
So, what’s a struggling penny stock to do when it can’t pump its value anymore? It has another trick up its sleeve…
The Reverse Split Shuffle
Once a stock has diluted its shares and the price plummets, it’s time for the company to employ a nifty maneuver to get its price back up…
But remember, they can’t do it with press releases because the float is too large now.
They need to complete a reverse stock split.
This is when the company consolidates all the shares of the company into fewer shares. The company can do a 1-for-2, 1-for-5, or 1-for-10 reverse split. — any number it chooses.
Now that fewer shares are available, the value of each share goes up.
Learn more about reverse stock splits here.
But the company’s fundamentals or value haven’t changed one bit. It’s still the same old sinking ship, just wearing a fancier suit.
I explained the penny stock lifecycle yesterday during Pre-Market Prep.
A member noticed that most of the stocks we trade are former reverse splits.
The reason for that is the penny stock lifecycle.
It goes round and round in an endless loop. Pump, dilute, reverse split, repeat.
As a trader, it’s essential to educate yourself, understand the risks, and approach penny stocks with a healthy dose of skepticism.
Knowledge is power — it separates the winners from the losers.
Want lessons in real-time every morning? Join Pre-Market Prep and get so much more as part of the Daily Income Trader system.
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade