How Penny Stock Companies Get Cash

We see it every day in penny stocks. It’s called a toxic dilution.

Let’s say you’re a wealthy person or you run a hedge fund. If a tiny company comes to you and offers you a block of a million shares, what’s the first thing you’re going to say?

How to target payouts every day in the new 24-hour markets

The Big Picture

Here’s the thing with penny stocks…

All of these tiny companies need money. Most of them don’t even have a real product. So, they have to raise cash just to stay alive.

Now, some of these companies change industries at the drop of a hat. Like degenerate traders, they chase what’s hot so they can raise more cash.

Which means the first thing an investment bank asks when a company offers them a one million share block is…

What’s My Discount?

And therein, my friend, lies the crux of toxic financing.

If you were going to buy 1M million shares of a company, you could just log into your broker, create a buy order, and pick ‘em up at the market price, right?

So, when a company asks you to buy, you’re going to ask for those shares at an extreme discount. It’s basic risk-to-reward.

So, what happens to the stock when there’s toxic dilution?

Basic Mechanics of the Stock Market

This is stock market 101, but a lot of people come to trading without knowing it.

Let’s compare it to the houses in your neighborhood. If your neighbor has the same house as you and sells it for 50% off the market rate, what’s gonna happen to the Zillow Zestimate on your house? It tanks all the comps, right?

It’s the same idea with toxic dilution. The buyer gets a huge discount, which tanks the stock price. I’ve written about diluted shares before, but here’s a fresh example…

It’s almost as if Singularity Future Technology (NASDAQ: SGLY) knows how to play the game:

In mid-July, the company closed an offshore equity round and announced it was pivoting to AI data centers.

Chat rooms screamed “funded” and got things going. Due to reverse splits, SGLY is a micro-float, so every move is amplified, okay?

So, between financings, chat rooms, and short sellers, the stock turned into what looks like a multi-week pump-and-dump.

Here’s how it played out last week:

1. On August 17, the company announced a $30M Reg S private placement at $1.39 per share.
2. On August 19 it announced a $1.8M registered direct offering at $3 per share.
3. On August 20 it announced a $5M private placement at a premium.
4. Meanwhile, the company also announced a non-binding agreement “to evaluate a potential 900-acre AI data center campus […]”

Pay particular attention to what happened on August 20:

The stock spiked on the data center news. Some traders (probably bagholders) saw the “above the market” private placement as a positive.

Short sellers piled in. Why? Because they don’t believe that a company that pivots from freight in China, to crypto in 2021, and now AI data centers will EVER be profitable. They’re probably right. They got squeezed anyway.

After the $5M offering SGLY finally tanked as expected.

My Take

Did I mention that the company is changing its name (again) to Compower Ltd?

Remember, penny stock companies are in the business of staying in business. And that means name changes, industry pivots, and offerings.

They are trading vehicles only. That’s why I say trade ‘em, don’t date ‘em. Focus on the patterns and never buy the hype. If you get caught on the wrong side of one of these, cut your losses and move on. Lesson learned, okay?

Watchlist

StablecoinX Inc. (NASDAQ: USDE) is a crypto-related momentum play that ran +89% on Friday (August 21).

USDE showed up on my Oracle Algo on Friday, with a signal at $5.10. As you can see, it was a solid winner.

Watch this week for a hold above its listing day high of $8.20 with major resistance at $9.97.

On My Radar

• AI demand is massive and so is the capital required to build it
• More AI: Anthropic aims to top SpaceX IPO
• Citadel made a pretty penny from the Situational Awareness debacle
• Join my friend Ben Sturgill for his Fast Fall Workshop starting tomorrow (its free)