The big account killer – Dilution and the terror of Reverse Split. (Post 5/45)

Now it's our turn to the 5th post.

In the previous one, I commented on these penny stocks being typically operated on the nose. They just need cash to pay their bills, pay themselves and to pay their bills. But, a real bank isn't going to loan you a ton of money to be paid back by a basement company that doesn't have any real income. The shareholder.

The way they collect your money is known as the Dilution.

Imagine that the overall value of the company is a big pizza. At present, it is divided into 10 slices (shares). You own one slice. You have 10% of the total company.

The CEO is in need of cash, though. So what does he do? All he has to do is lawfully appear 10 brand new slices and sell them openly.

There are now 20 slices in all. There's still one you haven't owned. You've got half of the company. But since it's a lot more shares that are entering the market (a lot more supply), the share price of each of these shares decreases like a rock.

Your money? Gone. Simply vapored directly into the company's bank account.

This is the worst ploy of all penny stock tricks. \*\*The Reverse Split\*\*.

Suppose a company issues so many shares that its stock price falls to $0.25. No brokers and exchanges like that. They sometimes threaten to eliminate the company altogether because it's too inexpensive.

So the company performs a Reverse Split (an RS). They say, "for every 100 shares you have, we're going to combine them together into 1 share.

Assume that the stock is at $0.01, and the new magically merged stock is now at $1.00.

Beginners see the chart and say, " Wow, the stock has jumped to a dollar now! It's recovering!"

No it isn't. It's a full ruse. Suppose you were going to buy 10,000 shares for $100 yesterday, and now you have 100 shares of that stock, for the same $100. You didn't lose or gain one penny of your account balance.

But this is why the Reverse Split is a death sentence.

It's now artificially rejuvenated and pushed back up to $1.00, so it can drop back down once again. So what does the broke CEO do the very next week? He begins to print new stock shares again. He dilutes the stock from $1.00 all the way back down to a penny.

This is what traders refer to as the Death Spiral. Dilute. Reverse Split. Dilute again. It will suck a new account down to nothing.

When you have an obscure penny stock that you're holding overnight, you're essentially praying that they don't drop one of these bombs on you while you are sleeping.

So far as traps, enough of the gloom and doom.

Now you know how the game is rigged against you, let's get over to changing gears. We'll discuss how to retrieve a stock chart in post #6 and what lines and bars you have to pay attention to.