The biggest penny stock risks come about via negative situations that adversely impact the stock price.

Over the next few weeks we’ll be looking at various negative situations to look out for.

The Reverse Split

Company share splits are common among the larger Blue Chip companies as a way of issuing more shares and reducing the share price.

Conversely, reverse splits do the opposite. A company having a 100 for 1 reverse split is reducing the number of shares outstanding by 100 times.

After the spit the price of the shares reflects the new ratio. So a penny stock worth $0.05 suddenly becomes valued at $5 as it is 100 old shares. So, if you were holding 100,000, at $0.05, worth $5000 you now hold just 1,000 shares, at $5 also worth $5000.

So, initially the value of the shares remains the same.

However, rarely do investors believe that the stock will retain the new higher price, it is a still a penny stock company after all.

Investors will start selling the stock on this lack of confidence which will, in turn, trigger more investors to sell.

Also, the reason for the reverse split in the first place is so the company can issue more shares and when they do this further deflates the share value.

We would not recommend buying or holding a stock that will shortly be the subject of a reverse split.

Todd B.

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