January 30, 2016
Help! My stock is falling in value faster than a fat piggy sinking in water. Have you ever wondered why certain stocks fall in value really quickly? One explanation could be stock dilution.
Dilution is caused when shares are issued or converted from convertible securities in any form. These new shares can decrease the value of existing shareholder shares.
It’s important to understand a company’s share structure before diving into a dilution discussion. A company’s common shares, which will be our focus today, consistent of:
— Authorized shares (a/s): The total number of shares a company can issue.
— Outstanding shares (o/s): The total number of shares a company has issued.
— Restricted shares: The number of shares that can’t be traded for a specific. period of time or restriction that are a part of o/s.
— Float: The number of o/s that are trades in the market.
Filings and various websites offer a company’s share structure (SS) info. OTCMarkets is a common source of SS info for OTC tickers, but may not be up to date. Yahoo! Finance can usually offer SS info for most penny stocks traded on the U.S. Exchanges.
Common shares are a piece of a company’s overall capital structure. Feel free to read Investopedia‘s discussion. Preferred stock can sometimes be convertible into a certain number of common shares, and thus opens up a trader’s mind to the various dilution possibilities.
A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure…www.investopedia.com
Back to dilution. It’s important to grasp the basics of this dangerous activity so you can protect your trading funds. Here’s a discussion of dilution at the Motley Fool. Here’s another discussion by Frank Demmler at Carnegie Mellon University.
Stock dilution refers to the issuance of additional stock by a company, for any purpose. Some of those purposes are bad…www.fool.com
Dilution? It may not be what you think By Frank Demmler Anti-dilution protection.Everyone has heard that phrase. Most…www.andrew.cmu.edu
Dilution pros (yes there are some):
+ Gives the company a source of funds it may not have.
+ New funds can aid the company in improving operations to sell products and service, which can result in company profitability and increased shareholder value.
+ Can increase the pps if new investors purchasing shares pay a pps higher than the current pps value.
Dilution Cons (common with OTC tickers):
— New shares could be issued for a value lower than the current pps. This is common with OTC tickers.
— New shares could be issued to settle toxic debt of which interest payments were too high for the company to pay. These share issuances are usually for a deep discount to the debt settled. For example, $20,000 debt at 20% interest is settled with 1 billion shares. That would be a cost per share of $.00002. Even selling at bottom at $.0001 would net 5xs profit for that financier.
— Shares could be issued to the CEO or vendors as compensation or payment for materials/services. Usually the shares issued are great to allow the receiver to sell the shares at an amount to cover the initial liability.
— Share issuance signals red flags to traders that the company can’t obtain financing or the company is in trouble funding operations. The pps may fall to reflect the sentiment.
— Reverse splits (r/s) may be encourage from the company because the pps may be at $.0001 now. A reverse split would decrease the SS and allow the pps to fall again when more shares are issued! The trader not only loses when $.0001 was reached but loses further when $.0001 occurs again. Let’s say a 2000:1 r/s occurs and you hold 200,000 shares and the latest pps was $.0001 ($20 is being traded). After the r/s you own 10 shares and the pps is $.20. Overtime the pps falls to $.0001 and you’re holding for whatever reason still. Your 10 shares are now worth $.001! Lol?
OTC tickers in particular generally use dilution as a primary means for funding operations. This isn’t surprising because most of these companies have no other cash flow, can’t obtain loans from traditional sources available to mid and large cap companies, and have bad credit histories.
Does that mean you should go purchase stock of a company where these newly issued shares are being sold into the market? Uhhh, I don’t suggest it unless you can short sell. In steps the primary focus today- how to spot dilution.
I use four ways to determine dilution, and each are presented below in order of speed of determining:
+ Look at the 6-month or 1-year chart.
+ Watch the market makers participating on the L2.
+ Call the transfer agent (TA) assigned by the company. Track the o/s changes daily or weekly over a period of time.
+ Read filings made for share issuances such as the 10-Q or SC 13G.
Below are examples of these methods.
A chart can show volume spikes. These volume spikes can be explained by various phenomenon but in the OTC it’s usually dilution causing all those newly traded shares to appear.
NTEK 1-Month chart showing mini pps spikes and corrections as the pps falls overall.
NTEK 3-Month chart showing large volume spikes at the end of a dump.
NTEK 1-Year chart showing volume increasing overall during and after the pps spike.
NTEK 3-Year chart showing volume as a primary indicator. You can see clearly the volume is dramatically larger at the beginning of the promo. Where did the shares come from? You may know now…
The Investor Hub red versus blue volume indicator can also be used to aid in spotting dilution on a ticker chart. Red means Bid slaps while blue means Ask slaps. Dilution can occur via both Bid and Ask transactions but desperate dilutors Bid whack most of the time. Why? Because they most likely received shares at a deep discount to the current pps and unloading shares before buyers catch on and stop buying is the priority. Buyers slap the Ask when emotionally excited about a ticker and that’s a dilutor’s best case scenario. As the Ask slapping ends buyers move to a mindset of Bid sitting to get cheaper shares. The dilutor doesn’t mind this scenario either because they’ll sell to the Bid as large Bids appear.
Watch the MM Participation on the L2
Specific market makers are often utilized by certain dilutors. Here are some common retail dilutors that traders have identified over time, from my Market Participants blog post:
ACAP, AGIS, BAMM, BMIC, CHIG, CLYP, FANC, FRAN, JIMK, MAYF, NATL, PERT, SACM, UCAP, VERT, VFIN, VNDM
Diluting MMs generally appear on the L2 as having 10,000 shares for trade. Countless Ask slaps hit the MM’s 10,000 but the count never changes.
Call or Email the Transfer Agent
Once you obtain the transfer agent contact info from the company or a specific website service then contact them. Ask about the a/s, o/s, restricted shares, and float share counts. Track the values and see how the numbers are changing. This method is the most evidential and accurate IMO. For TAs that are gagged, that is refer you to the company for SS info, be afraid. Most company management will give you the SS info IF you can get a hold of someone…
I’ll use BBDA, a favorite sub Pink Current I like to watch, as my example.
OTCMarkets ticker search for BBDA showed the following TA info:
Madison Stock Transfer
I contacted Michael Ajzenman with Madison Stock Transfer and he confirmed the following share structure info at various dates:
— 2/27/14 a/s 9.8b and o/s 4,519,976,772
— 3/11/14 a/s 9.8b and o/s 4,702,424,673
— 4/8/14 a/s 9.8b and o/s 5,385,698,072
You can see in a little over a month that BBDA’s o/s changed by 865.7 million shares. The pps continued to fall as a result. The chart shows the dilution clearly and the L2 shows VFIN as the primary MM each day sitting and leading the Ask at 10,000 shares.
This option is last because it’s the slowest, and at times never even occurs as the ticker can delist through the various OTC levels with no filings. The info you do see usually isn’t all encompassing and leaves you drawing your own conclusions.
I’ll use TALK, a QB ticker, as my example for filings research.
You can view TALK’s filings at OTCMarkets here.
Get Current OTC Quote, Trade and Company Information for OTCQX, OTCQB, OTCBB,OTC Pink, Grey Market and penny stock…www.otcmarkets.com
You can see a 10-Q (quarterly financial filing), 10-Q NT (late financial filing request), Form 4 (changes in ownership), and SC 13G (5% or greater acquisition reporting) filings in the past three months.
The 10-Q as of 2/28/14 shows a SS of 500 million a/s, as of 2/28/14 and 8/31/13, and an o/s of 74.5 million and 46.3 million, as of 2/28/14 and 8/31/13 respectively. That means about 28 million new shares were issued in 6 months with plenty of room to issue more to 500 million.
The Form 4 shows a director purchasing 23,000 shares at $.026 per share which is higher than the current pps. This could be signaling management confidence in company improvement prior to the next filings should more shares be acquired.
Form SC 13G shows 9.99% shares being issued to IBC Funds LLC and two individuals.
No other specifics are given such as the cost or why shares were issued. Sometimes management may divulge this info to shareholders prior to the next financial filing. IBC Funds could be a toxic financier receiving shares for a debt settlement with the company.
Dilution is best to be avoided once identified with entry to be considered once dilution has been proven to have ceased. Traders can use charts to see large volume spikes generally signaling new shares entering the market, volume spikes not explained by possible prior trading volume. The L2 can show common MMs appearance at 10,000 shares with no share change on the L2 as transactions go through. Calling the TA can help confirm chart and L2 theories of dilution. Company filings can give specifics of why, how much, when, and who is receiving shares.