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Author | Topic: What Most Penny Stock Investors Don't Know | |||||||||||||||||||
Buzsaw Inactive Member |
Have you wondered why your penny stock company may be doing well but your investment in it either dwindles or goes no place? This may be one reason. IMO, pressure needs to be put on the SEC to fix this problem which seems to never get addressed.
Webmaster Frequently Asked Questions Unfortunately the link does not work so I'll need to post the entire letter since it's needful to get the whole story. I'll leave the SEC link up for any who wish to email them regarding this or for other purposes investment related. I just found this this eve and now I see why some penny stocks I have had for years have such a offer/bid spread and no reasonable fills possible. Others that don't perform irrationally. I'll definitely be changing my penny stock strategy from now on. When a penny stock should be going up but continually goes down, maybe time to dump and reinvest. I have learned to shun ones with wide offer/bid spreads as these seem to be especially problematic. I don't invest much into stocks anyhow. I dabble with a fixed amount and do or die with it. Right now it's about three times what it was a year or so ago, but that can change very rapidly. I diversify with a number of small amounts into each, hoping to make a hit or two on occasion. I find that when I do, I make ok but then the MMs (marketmakers) seem to step in and take over so as to squeese out the investor who gets the bones that the meat eating MMs gobble off of. I'll let another mod review this for promotion/suggestions. Coffee House Please.
From: Sepod writes: [spodlofs@optonline.net]Sent: Wednesday, November 19, 2003 1:31 PM To: rule-comments@sec.gov Subject: Short Sales... File No. S7-23-03 Short Sales File No. S7-23-03 To Whom it may Concern at the SEC, There's a rule that the market makers use ... a rule that only has lessthan two hundred words in it ... and that rule allows them to naked short an OTCBB or Pink Sheet stock into oblivion. It allows them to literally create, out of thin air, as many shares asthey need to maintain an orderly market. "(B) Proprietary short sales No member shall effect a “short” sale for its own account in any securityunless the member or person associated with a member makes an affirmative determination that the member can borrow the securities or otherwise provide for delivery of the securities by the settlement date. This requirement will not apply to transactions in corporate debt securities, to bona fide market making transactions by a member in securities in which it is registered as a Nasdaq market maker, to bona fide market maker transactions in non-Nasdaq securities in which the market maker publishes a two-sided quotation in an independent quotation medium, or to transactions which result in fully hedged or arbitraged positions." This rule allows a market maker to create a share in a company by simplytaking the money from the buyer and making an electronic entry into their brokers' account, and the broker then electronically credits the buyer with one share of that company. But several things that no one is aware of take place in this transaction.1. The buyer thinks that his share actually exists, but unless he or she has read his account agreement very carefully, he won't understand that all he did is give money to someone other than the company and never got any actual proof of ownership. His certificate, presumably, is sitting at the DTCC. 2. The market maker filling the order for one share has the buyer's money, and gave nothing except electronic acknowledgement of receipt of it ... the electronic entry in the buyer's account. One very important thing to understand here, is that at no point inthis process, did the company in which the buyer 'invested' ever get one single dime of the money paid by the buyer for that share. There is a tremendous misconception out there that causes many to assume that when they buy a share of a company's stock, the company gets the money. This is only true if the buyer is buying an IPO, or a privateplacement of shares from the company. In any other sale or purchase of a stock by an investor, the company does not even see the money. This is particularly vexing when one begins to understand whathappens in naked shorting situations. Situations where the provision that allows for naked shorting to maintain an orderly market is abused. Understand that whoever is doing the naked shorting is the one receivingthe money. They keep it. For as long as it is convenient to do so. That is where the abuse of the rule comes in. That rule was created to allow for market makers, who by becoming marketmakers, agree to 'make a market' in certain stocks. That means that they will sell you a share, or buy a share from you, even if there isn't any available, or there are no other buyers for it. The Market makers' job is at least partly, to provide liquidity to the market. In thinly traded securities, or securities where there is a small public float, the market makers' ability to naked short is crucial to the liquidity of the market in that security. The abuse takes place when the market maker for whatever reasondetermines that the market for a particular security has become "disorderly". Too much buying pressure, for instance, can cause a price spike in that security that would have no relationship to the true book value of the security. The market maker then determines that he will naked short to fill orders, knowing that by doing so, the price will not explode on unusually high demand because he can literally issue new shares under this rule. The market maker then waits, with an open naked short position in that stock, until the buying pressure subsides, and he can buy enough shares back at lower prices to cover his naked short position. The rule does not have any time requirements and that allows for themarket maker to keep a naked short position open for potentially years. In reality, until the buying pressure subsides enough for him to buy back at lower prices however many shares he needs to fill previously filled orders that make up his naked short position, it simply stays open, and the money sits in his account. Someone is going to ask the question, "So, how big are all those nakedshort positions, anyhow?" There is another provision that says that the market makers do nothave to publish their open naked short positions. Never. At all. All OTCBB and Pink Sheet securities can be naked shorted - indefinitely - by market makers under this rule, and there is no way that an investor can discover if there is an open naked short position in a stock he may be interested in, or even how big that short position is. So far, the SEC does not see a strong need to correct this situation,either. Think about it. There are unlimited amounts of shares that were neverauthorized or issued by a company made available to the unsuspecting investor. They are authorized and issued by the market makers under this rule, and the company never gets any money from the sale of shares created under this rule. The temptation to abuse this rule is irresistable. Just do the math.A million naked shorted shares sold by a market maker at 0.01 (one cent) is $10,000 that the market maker keeps in his account, and that the company does not get. At 0.10 (ten cents) the market maker gets to keep $100,000. Now, that is for each million shares that the market maker creates. Under this rule, if a company and/or a group of shareholders begin tosuspect a short position exists in their security, they can not discover this from any published source. The price of the stock remains constant, or goes down, even though there is unusually heavy buying ... buying that goes on for years in some cases. The company thinks that there is someone illegally shorting theirstock in an attempt to ruin the company. The shareholders think that the company is illegally printing shares behind their backs and is scaming them. Eventually, this distrust between the company and it's shareholders becomes so great that investors start selling, or the company, already damaged by a supressed share price, is forced to issue additional shares into the market because other collateral-backed loans can not be made with share prices so suppressed. This is what the market maker is waiting for ... sometimes for aslong as years. In both cases, the market maker eventually gets his naked short position covered, and all it cost was the company's reputation, the shareholders' money, and the SEC's full cooperation by allowing this abuse of the rule. There is a third situation that the market makers naked shortinto ... a stock that is a likely prospect for failure. In that case, they just continue naked shorting no matter what, keeping the price suppressed, and eventually the company files for bankruptcy, and ... the company goes out of business, the shareholders lose their investment ... and the market maker keeps the proceeds of his continued naked shorting. A good question for the SEC would be, "Seeing as how thecompanies that failed never got the proceeds of the sale of stock over and above their issued and outstanding, but the market makers did, isn't the SEC allowing actual fraud to take place, and condoning it by the creation and continued existance of this rule?" Like it or not, the SEC has allowed securities fraud to runrampant in the OTCBB and Pink sheet stock markets by simply looking the other way and allowing the market makers to target the OTCBB and Pink sheet markets as a source of huge amounts of cash, literally stolen from investors by the third party creation of shares by an entity other than the the issure - the company. This rule is nothing less than blanket permission by the SEC formarket makers to become the issuers of company stock, no matter what the company's official authorized and issued amounts are. Sincerely, Stanley Podlofsky80 Sycamore Street, Massapequa, NY 11758 516-799-5121 BUZSAW B 4 U 2 C Y BUZ SAW ---- Jesus said, "When these things begin to come to pass, then look up, and lift up your heads, for your redemption draws near." Luke 21:28
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AdminNosy Administrator Posts: 4754 From: Vancouver, BC, Canada Joined: |
I'm told Buzz that the rules were changed before the letter you post was issued and that this is no longer an issue.
SEC rulinghttp://www.sec.gov/rules/final/34-50103.htm with naked shorting defined here: Naked Shorting With thanks to a distinguished lurker.
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Buzsaw Inactive Member |
Hi AdminNosey. Thanks for the links. However I see my letter in the OP is dated in Nov 11/03 and the link concerning the new ruling is dated earlier in the year. As I understand the letter in the OP, the complaint is that MMs or market makers have a loophole in the rule which allows them to do what they appear to be doing in these pink sheet penny stocks, abusing the loophole with the SEC essentially looking the other way. I will see what I can dig up to clarify as to the distinction between market makers and broker dealers et al. We can leave this in limbo if you think best. However perhaps if it gets promoted, someone out there can help us out. Or perhaps you can apprise me as to whether I am understaning the ruling correctly.
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Buzsaw Inactive Member |
Hi again, AdminNosey. I've found the following links, one from the SEC dated 4/11/05 which show that the new Regulation SHO rules apply only to "threshold securities" of which the Pink Sheet penny stocks are not inclusive, allowing for an exemption to the rules on these stocks.
http://www.sec.gov/spotlight/keyregshoissues.htm GoPetition - Error 404: Page not found - 19k Division of Market Regulation:Key Points About Regulation SHO Date: April 11, 2005 ABE: Perhaps if I could get this promoted in Coffee House we can discuss the particulars in the thread in order to determine just how it applies. Edited by Buzsaw, : No reason given. BUZSAW B 4 U 2 C Y BUZ SAW ---- Jesus said, "When these things begin to come to pass, then look up, and lift up your heads, for your redemption draws near." Luke 21:28
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Buzsaw Inactive Member |
Bump. Hi AdminNosy. Did you catch my last message yesterday?
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AdminNosy Administrator Posts: 4754 From: Vancouver, BC, Canada Joined: |
Thread moved here from the Proposed New Topics forum.
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Taz Member (Idle past 3321 days) Posts: 5069 From: Zerus Joined: |
I am completely ignorant on anything relating to stock. I don't even know what penny stock means. Could you summarize that letter to make it easier to digest for someone like myself? I don't understand most of what is said in there.
Place yourself on the map at http://www.frappr.com/evc The thread about this map can be found here.
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Buzsaw Inactive Member |
Hi Gasby. I suggest anyone unapprised on penny stocks go to the Wikepediadefinition
Penny stock - Wikipedia Also check out the "pump and dump" process at Wickepedia. Pump and dump - Wikipedia This info will give you a pretty good introduction into penny stocks and some of the reasons they can be dangerous to your welfare. There are folks out there who make a lot of money trading these if they know how to work the runs up and get out before the rug's pulled out and on occasion a hit will be made on a very small capitalization company which gets big. I once had a batch of one of these which was a gas and oil co. I made out good on it but my mistake was selling all I had way too early. The letter pertains to the MMs (market makers who actually manage the marketing of stock on the boards. What Nosey Ned aluded to was that finally some restrictions were put upon the market makers in the stocks listed in the bigger boards (not penny stocks). However as per the guidelines by the Securities Exchange, these penny stocks which are hard to control are exempt from the guidelines. Thus the MMs can sell "naked" shares which are phantom shares without ever having to produce a stock certificate of onership to anyone for them. They are non-existent, but in effect become like shares in that they dilute the happless small cap struggling company's equity and can eventually bankrupt the company who's stock becomes worthless. At the same time they pocket all the cash received every time they sell "short" a stock and the investor who thought he/she bought a valid stock actually bought so much thin air. Yes the purchaser can resell the stock if there remains a market on it to some other happless victim, but each transaction dilutes the market a little more. Thus even if the company is producing and working hard to make an honest go of it, the rug is being pulled out from under their financial infrastructure by these "pit bulls" as I call them. The problem is that the SEC looks the other way on these unscrupulous robbers with the loophole, allowing them to destroy a lot of these new companies trying to get a start, and as the 2nd link states also puts thousands of hard working employees out of work. The SEC should erase this loophole and at least make this robbery illegal. I am experiencing two examples of where I'm quite positive this is going on. One is stock symbol APPI, a penny stock which has been running for years at a fraction of a cent per share. They have been into plant based nutrients, et al. They are now allegedly negotiating to merge into a bio-diesel and clean coal co. which is a popular product these days. Their stocks have been cycling quite wildly since announcing this, at one time briefly going over a cent a share but dropping back rapidly. They also got a rating by a stock company which gave them another lesser rise and fall today. With all this news, one of two things are going on. Either the company is staging a "pump n dump" to sell of some shares or promote their stock or the MMs are selling a whole lot of shares they don't own at the high prices, making sure they get the sell fills before John Q public gets his fill. These MMs are likely selling "naked" shares that don't exist which they didn't pay a cent for and the selloff by them drives the market artificially way back down. The MMs buy up shares they can buy at low prices which they drove down and for the ones they can't buy, they simply pocket the money and wait to sell more on the next run up. The way you can tell there's dilution is that every run up gets weaker as the dilution of the happless companies stocks ensues. Of course if the company is issuing and selling off more of their own shares on the rise, they are themselves diluting their own capitalization which automatically dilutes each share of existing stock. Often this is necessary for capital and may be beneficial in the long run for the investor is the dilution is not to the extent that it essentially wipes out the investment of existing stockholders. This is how I am understanding the process. Perhaps others who are familiar with all this may be able to correct or provide further info regarding all this. The bottom line is that if you dabble in penny stocks, do a lot of paper trading on your own before you invest and never put cash into these that you cannot afford to loose all of your investment. You can read a lot on the message boards of some of these companies as to what some of these penny stock traders are saying. APPI has such a board which I'm reading. I don't think the board is actually run by APPI, but not sure. It's rather humorous as these traders are like a cheer squad for a good $$ day. You can also learn some from them. BUZSAW B 4 U 2 C Y BUZ SAW ---- Jesus said, "When these things begin to come to pass, then look up, and lift up your heads, for your redemption draws near." Luke 21:28
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Buzsaw Inactive Member |
Having posted the above messages, I need to make it clear that there are a whole lot of bogus small cap so called companies which are nothing but scam operations. What these people do is set up a small operation of some kind and begin promoting stock sales by hiring PRs who are promoters of small cap new companies. After they get organized and going with some high powered promotion they alleg that they are negotiating a merger or something and get that promoted by the PR, when in fact there's nothing to it. To cover themselves, of course, there's the usual disclaimer absolving themselves from any liability for their deceit. This drives up the penny stock from maybe a fraction of a cent to something higher or a cent, et al. The company dilutes the stock to the place where they do a reverse split in which they exchange one share for every 20 the invester holds. The investor's money is gone and the company repeats the process with the one for 20 stocks.
BUZSAW B 4 U 2 C Y BUZ SAW ---- Jesus said, "When these things begin to come to pass, then look up, and lift up your heads, for your redemption draws near." Luke 21:28 |
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pennystockville Junior Member (Idle past 5107 days) Posts: 1 From: Fountain Valley , California, USA Joined: |
That's really awesome.. Trading penny stocks can no more be a big deal, if you are equipped with our alerts at http://www.pennystockville.com . Spam (Personnal Publicity) Edited by AdminSlev, : No reason given.
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AdminSlev Member (Idle past 4669 days) Posts: 113 Joined: |
Personnal Publicity such as this isn't allowed on this Forum pennystockville.
Message removed. Edited by AdminSlev, : No reason given.
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MalcomWagon Junior Member (Idle past 5089 days) Posts: 1 From: Garden Grove, California, USA Joined: |
Penny stocks trading can be trouble-free if followed with stock broker. Lots of resources and tools are accessible by using which the investor can obtain the profit in stocks. One can get more information from the internet. He can also subscribe the paid newsletters.
Edited by MalcomWagon, : No reason given. Edited by AdminModulous, : removed advertisement url
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