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Question

QUESTION: Hi Steven,

I want to start trading in penny stocks at the TSX Venture Exchange, and I can see in the Listed Company Directory at the tsx.com website that there is a Recently Delisted companies list.

I wonder what happens if I hold a company share which suddenly gets delisted from the stock exchange?

- If the reason for the delist is not paying its fees, does it mean that my money is gone??

ANSWER: Yaacov, the TSX Recently Delisted list contains companies delisted for many reasons. Those include acquisition, change of exchange (some uplist to the TSX, while others fall down to the NEX or move to other Exchanges), while some are due to trading suspension/cease trade orders.

If you hold a shares in a company that gets suspended/delisted or cease traded for regulatory delinquincies, chances are you will lose all your money invested in that stock — some come back, but the average is pretty low. However, that is only one of the issues you have to worry about when investing in penny stocks. Most of these companies never go out of business — instead, they hang on, sell more and more stock, perform reverse stock splits when needed, and try again. Even though the company may still be around, it is not unheard of companies that have lost 99+% of their value over time, due to the reverse stock splits. Investing in development and exploration stage companies is very, very difficult. The market should only be for experienced investors, and for only a portion of their risk capital.

QUESTION: Hi Steven,

I understand your point. I’ll tell you what I have in mind. I was thinking of buying 3-4 stocks which value is 0.005$ per stock (half a cent).

This is the lowest trading price I saw in the active market.

Well, if excluding reverse stock splits and delisted scenarios (which are pretty much the only risk factors..), there is no much place for these stocks to go down. Being patient enough, these stocks will eventually have a trading cycle and it looks like a good chance of selling at a higher price — a price which will double the money value in the worst case.

What do you think of this approach?

What do I miss here? I’m sure I’m not the first to think of this method, and it looks pretty promising.

Thanks,

Yaacov.

ANSWER: Yaacov, I can’t give you specific investment advice, but here are some things to think about.

If a stock is trading for half a cent, it is trading there for a reason. Many of them are already bankrupt, and those are likely to disappear soon. Others are completely broke and likely to go bankrupt. Others that are trying to raise money can’t sell stock at half a cent, so the only alternative is a massive reverse split before they dilute the guts out of the stock (which usually drives the post-split price down sharply)

Many people make the mistake of thinking a penny stock is a good investment because it can’t go down any further. Of course, it can and often does. It doesn’t matter if the stock is trading at 1 cent or $100 dollars — the most an investor can lose in both cases is 100% of their investment, and it is thousands of times more likely in a 1 cent stock than it is in a $100 stock.

Thinking a sub-1 cent stock has a trading cycle is somewhat wishful thinking. Sub-10 cent? Maybe. But it depends on the company. Never buy a stock based only on the price — buy a stock on the fundamentals, which includes the ability of the company to remain a going concern. Depending on your risk thresholds, you may be able to find some that are low-priced, but it takes a lot of work and understanding how these venture markets work.

And, something else to consider. Remember the bid/offer mechanism of stock trading. The company may be bid at $0.005, but the offer may be substantially higher. Most stocks trading that low have (comparatively) light volume, and there might be so much stock bidding at $0.005 that you may never get any if you put in a limit order at that price.

QUESTION: Steven,

Thanks for the detailed answer.

From what I’ve heard, most of these companies don’t have a ‘real business’ at all. If we take for example the mining companies, their chances of finding something is very low. Most of the natural resources have already been discovered — it is like searching for a lost treasure. So basically, they don’t produce any output.

If that’s true, then what do those companies actually do? What is the trigger for their stocks value to go up once in a while??

Thanks again,

Yaacov.

Yaacov, most of these companies do have a real business, even if it is mineral exploration. But, if they are used as a shell, they cannot just roll in a new business — the TSX will halt the company until they review the pending acquisition. Those halts typically last for 3-12 months, and can go longer (or in some cases, forever — the stock never does resume trading). Playing the shell game is high-risk, and only for the patient, as you can have your shares be unable to be traded for a very long period of time.

Exploration and Development companies (as opposed to penny stocks which is far too much of a generalization) do not trade like shares of more established companies. They don’t have earnings, and most don’t have sales. Instead, they trade on other bits of news and rumors. They also need a steady source of funding to stay alive, which usually takes the form of selling more common shares. It would take hours to list all the factors that can make these stocks move — you pretty much just have to follow the market for awhile, get a feel for how things work, who the players are and what to look for.