It doesn't matter whether you're looking at an OTC penny stock or one that is listed on a more prominent exchange like the NASDAQ or Canada's big board TSX, the public markets are full of companies promising a bright future, combined with a history of losses and dilution.
When it comes to looking for monster gains, 100% or more in a matter of a year, a few months or in some cases just a matter of days....the bests bets are with speculative companies. You could do very well over the long haul with a company that's included on a major index like the S&P 500, or the NASDAQ 100, but history tells us you're not going to double your money in one year or even in three.
But if you get into a bio tech that all of a sudden catches the attention of investors, or a Jr. Mining company in a hot sector like Lithium right now, or a company with a new technology...then sometimes it can seem like the sky is the limit. That is unless or until the bag closes, and all too often its just a matter of when, not if.
So why does this happen? Why do companies with the worst histories so often fly and then tank? I am going to offer up my opinions on the matter, you can decide whether they have merit yourself.
Let's say there's a company that's been around 10 or more years, its never made a dime in profits and yet its paying big money with some directors and officers pulling in millions per year. The only problem is the company is running low on funds. So what happens?
A firm providing investment banking services might be engaged and perhaps they will underwrite a secondary offering, buying 10 million shares at say $10 per share. Great, now the company has just raised $100,000,000 less fees and has enough cash to keep the lights on and pay checks going out for another few years.
But now there's an investment bank with 10,000,000 shares of some money losing company that they paid $100,000,000 for. Do ya think they're going to be looking to sell them for less than what they paid? Nope...neither do I. They might engage other underwriters to participate, cutting them in.
Now we have a stock that I will suggest is ready to be put "in play". What do I mean by "in play"? Well, these investment banks have analysts, and its reasonable to expect their analysts to initiate coverage on Big Money Losing company. Maybe one of the underwriters sponsors one of those investor dog and pony shows. and now BML company is slated as a presenter. Maybe they have a hot new technology, something unproven but really cutting edge. Or maybe they could be merged with a Small Money Losing company, then analysts can start hyping things like economies of scale an synergies and BML and SML unite to form Massive Money Losing company, or MML.
Next thing you know MML is being touted on CNBC and by other media outlets, maybe some chop shops are alerted and they start pumping out emails hyping MML to their books. Everyone is making money, the company, the underwriters, the chop shops.....its party time. Picture the scene where the hookers come out in 'The Wolf of Wall Street'.
And the poor retail schmucks who buy into all the excitement, paying maybe $20 or more per share?Oh well, it sucks to be them. They can keep averaging down, and who knows....maybe at some future date Massive Money Losing company will come up with something that's profitable. And if not? Then the hedge funds can enjoy the downfall by shorting MML into oblivion.
That, in my opinion, is the game boys and girls. Play at your own risk, its a zero sum game....some get money and others get shares. And its usually the retail herd holding the bag.
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