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Think about the logic behind Dilution. Dilution is when the company adds shares to the o/s.. The o/s is the amount of shares that can be traded in the public..In other words O/S is shares MM's and Public owns.. Which means when a stock is an IPO and she has 10m shares in o/s thats the most amount of shares that can held by the public.. So anyway when companies dilute who is buying on the BID? Not us.. Only because they are pink sheets and they can not be bidded on by the public. So for a stock to fall from .006 to subpenny and trade millions of dollars those are sells. MM's have to pay to keep that load for the public to buy.. Those shares arent free. Those shares are sold into the market. SCHB is down over 1.3b dollars on QBID alone.. True story.. They are the ones that keep buying when it goes down. Think about the logic my friend.
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When a company dilutes shares they give the shares to a clearing house to sell them for the company. The clearing house now is like any seller on the market that holds shares of a company. They are the ones selling at bid and the public is buying at ask. The MM's don't need to hold diluted shares at all. If the MM has someone willing to buy at .0005 for example and they can buy it from the clearing house at .0004 then they make the deal keeping the .0001 spread.
Now price movement during dilution is normally a demand effect. We know supply is being increased with dilution so what is happening to demand. Most companies dilute during good news or hyped up news causing the demand to increase. If the demand is overwhelming and is greater then the new supply and normal sellers then PPS can move up on dilution. If demand and supply increase equally together then PPS remains the same. And if the hype didn't work and demand didn't increase then the dilution will drive the price down.
This is why there is need for great news right before dilution. The company will normally only give the great parts of the news. Forgetting to mention cost and finances. Usually the news isn't nearly as great as it is claimed.
The newest tricks is dividends of another stock that will be restricted. They rarely ever get unrestricted and usually end up worthless. Another ploy is claims that the company wants to do a spin-off of parts of the company to OTCBB which usually never comes true and lastly the forward split. These ploys help raise demand for those wanting in on the dividends. Hopefully the demand will be large enough for a run and the company makes a killing on the sell of newly issued shares then when the hype wears off the PPS drops back down to the original PPS or lower.
You can make money on these if you forget about the dividends and make sure and sell on the peak of the PPS increase. You will make a lot more money doing this then holding worthless shares after the hype and dilution is completed.
[ December 26, 2005, 01:01: Message edited by: Ric ]
-------------------- Invest with your brain not with your heart.
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