Imagine watching a stock crash 30% in just five minutes…
Well, that happened yesterday during my Premarket Prep.
U.S. Energy Corp (NASDAQ: USEG) was flying high into the close on Tuesday and then bit the dust yesterday morning.
USEG 2-Day, 5-Minute Candles Chart; SteadyTrade
So what happened?
USEG announced a stock offering yesterday morning…It’s as simple as that.
And anyone who had our Breaking News Chat service would have known before we saw that big red candle.
BNC was on top of the event, as always.
So why would news of an offering kill a stock?
If you’re trading penny stocks, this isn’t just a nightmare scenario—it’s a very real risk.
And for many traders, it’s because of something that often flies under the radar: diluted shares.
Just as printing more money devalues currency, companies issuing new shares devalue the ones already out there.
It happens all the time in the world of low-priced stocks, so if you’re a penny stock trader, you need to be on the alert at all times and understand how it works.
Today, I’ll break it down so you can learn how to spot dilution before it hits you like a freight train.
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When a company creates and issues new shares, they’re “watering down” the value of the existing ones.
The market cap, or the company’s total value, stays the same, but now it’s divided among a greater number of shares.
For anyone holding existing shares, that usually means your position loses value.
There are several ways shares can be diluted. Convertible bonds, stock warrants, and employee stock options are a few examples.
But dilutive stock offerings, like what USEG announced yesterday morning, are what penny stock traders really need to be on the lookout for.
Dilutive Stock Offerings
A dilutive offering happens when a company issues new shares to raise capital.
In the case of many penny stock companies, they are burning through cash faster than they can make it…
The stock offering serves as a lifeboat for them.
And let me tell you, these offerings love to sneak up on traders.
They can happen during market hours, premarket, after-hours, or even overnight with zero warning or chance for you to react.
These events often crush a stock’s momentum and send prices spiraling downward.
And just like USEG, after a big runup, companies will cash in by raising capital through a stock offering.
And that leaves traders already in the stock holding the bag.
Struggling companies dilute shares because they’re desperate for cash.
It’s a way to keep the lights on when they’ve got no other options.
It might seem sneaky but it’s legit, and it’s part of the game of penny stock trading. sa
On the other hand, for larger, well-established companies, a share dilution might be a good thing.
They could be raising for an acquisition or a new product launch.
Be wary, though…the smaller ones that need cash just to stay alive might disguise their true intentions by including acquisition or new product launch language in their press release.
But in reality, it could be just a last-ditch effort to stay afloat.
No matter what, a penny stock dilution usually spells disaster for existing shareholders in the short term.
Protect Yourself Against Stock Dilution
If you want to avoid getting blindsided by dilution, here’s what you need to do:
Read SEC Filings:
Look for companies with warrants, convertible bonds, or registered offerings. These filings will often reveal the potential for dilution before it happens.
Use Stop Losses:
You should always do this with any trade, especially with penny stocks.
Sudden swings from a dilution can wipe you out if you’re not careful.
Have the Right Tools:
You need a robust trading platform with real-time data, charting, technical indicators, news, and more.
My top pick, and the one I use every day, is StocksToTrade.
It features everything mentioned above…PLUS, right now, you can get two weeks of both the STT platform and our Breaking News Chat service for $17.
Grab your 14-day StocksToTrade + Breaking News Chat trial today for only $17!
My Final Thoughts…
Diluted shares are a reality every trader faces, and it’s particularly dangerous for penny stock day traders.
They’re a hidden trap that can wipe out your gains in a flash if you’re not paying attention.
But with the right education, you can spot these risks early and avoid disaster.
Remember, trading penny stocks is a game of high risk and high reward.
If you want to thrive, stay disciplined, keep your stops tight, and always do your homework.
For more mentorship on trading pennies, as well as stock ideas, subscribe to my StocksToTrade Advisory service.
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