Penny Stocks and Reverse Stock Splits

Penny stocks there a joy when they skyrocket out of nowhere, bringing a smile to the face of the penny stock investor. While it is true penny stocks can provide explosive returns, they can provide losses as well. I have some experience with loss and penny stocks, and I have lost more than I have made, but my losses have not upset me as much as the management of these penny stock companies. Most of the losses have not come from the sub par earnings of these small companies but the decisions of the management to issue reverse stock splits.

A reverse stock split is when a company decides to reduce its number of outstanding shares by mathematically crunching an x number of stocks usually into one. If an investor has 100 shares of a company, and the company decides to issue a 100 to 1 reverse stock splits, the investor will be left with one stock. Companies do this to raise their stock price to attract investors, but it usually does not work. The stock price usually falls back to its original price, while the investor looses money.

Some companies are nice enough to issue press releases to announce the reveres stock split, but since the Security Exchange Commission regulations give companies the option of not announcing stock splits, investors sometimes do not see them coming. This is horrible for investors who have small amounts of shares. If an investor only has 35 shares, with a 100 to 1 reverse stock spit, the investor is left with no shares thus looses all money invested.

Penny-stock companies are infamous for having a large share structure. Some have over 30 billion shares outstanding, and as a result, even with great volume the stock price does not move. The demand is not sufficient enough to overwhelm the stock supply to create scarcity, to initiate a move in the stock price. It is of highest priority to look at the number of shares outstanding before seriously considering investing in a penny stock.

Companies possessing such a share structure are usually sub penny stocks, stocks trading below a penny, they are usually found on the lower exchanges such as the Pinksheets, and the Over the Counter Bulletin Board (OTCBB) along with other penny stocks trading below a dollar. The following are actual symbols of sub-penny stocks: JMCP, USXP, RSHN. You will notice how low the stock prices are, and you can check the share structure on the pink sheets and yahoo-finance.

I have lost 4,000 dollars on a small oil company, due to a reverse stock split. There was no announcement from the company at all. I believe the name of the company was Gulf Petroleum Exchange. To make matters worst, the company changed to a software company along with the reverse stock split. All of this occurred without informing investors through a press release.