Penny Stocks to Avoid
There is one type of penny stock to avoid, reverse split penny stock. If a company is doing a reverse split, the stock almost never ends well.
What is a Reverse Split?
A reverse split is to merge existing shares into fewer and higher prices shares. The shares are consolidated proportionally and it reduces the number of outstanding shares for a company.
Major stock exchanges have a listing requirement that forbids stocks to be trading under $1 for 30 consecutive days before a company gets a delisting warning.
In order to stay compliant, many companies choose to reverse split their stocks in order for their stock price to be trading above $1.
Some companies are doing so badly that they have to keep doing reverse splits just so they can still be traded on NASDAQ or NYSE. When you look at a weekly chart of a stock that keeps doing a reverse split, you may see a stock falls from $800 to $5. In actuality, the stock didn't really fall from $800 to $5, it just keeps reverse split the stock, and the chart has to be readjusted.
Never tempted to buy this kind of stock. You may think a stock falls from $800 to $5, it can't fall any further. Well, you'd be surprised when the stock does another reverse split, and the chart will be readjusted and it would seem the stock falls from $1,000 to $5.
The cheap gets cheaper. When you see that kind of penny stock or chart, you should avoid it at all costs.
Here's a recent example of a stock that did a 16:1 reverse split and changed its symbol to CMMB. The stock ANCN was trading around $5 before the reverse split and a reverse split of 16:1 would put the new stock price to 16x5 = $80.
ANCN changed its trading symbol to CMMB on 3/17 and the stock opened at $80 on that day. In less than 2 weeks, the stock was down over 60% to a low of $31.03.
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