Dealing with Dilution

In the self-centered world that we investors comfortably call ‘home’, an easy habit is formed by forgetting that contrary to what a company often reassures, its best interest must inevitably reside first & foremost in the well-being of the company before the shareholder. Recall that a company’s primary intention when going public is to raise investment capital that could sustain or bolster business operations. This credible & dangerous threat gives way to one of the most feared terms existent on the lower exchanges: Dilution.

Dilution of the company stock is often the suspect for the share price ‘gravity’ working on the lower exchanges. Indistinguishable from the effect of market forces on a chart, keeping a tab on the present share structure is typically the only legitimate means of detection. Calling the Transfer Agent (T/A) in order to get an accurate and honest count of the current share structure will usually suffice. A bright yellow flag ought to go up behind any company that gags the T/A. An honest company will often be open about its needed dilution, and will then express an optimistic outlook aimed to divert your attention away from the issue and back toward a future valuation.

As a penny stock investor (PSI) it is your responsibility to understand that dilution on the Pink Sheets is typically a necessary evil. A steady rate of dilution (as determined by share structure intervals) is healthy for a company that is progressively making significant strides. A stagnant company that has made minimal progress over periods of time and continues to dilute ought to be dropped immediately. Like a jet on the runway, there must be a set rate of acceleration (company progress) to overcome the Pink Sheet gravity.

On the lower exchanges many penny stocks represent recent start-up companies seeking funds for their bold endeavors. It’s advisable to NEVER invest in a start-up company that is unable to produce highly-progressive tangible progress within a few months. Keep an eye on the company, but never get in right away when you can get in at a lower price down the road. If the company has no unique & distinguishable comparative advantage to its competitors within the sector, it should not even be watched at all. When such highly-progressive tangible progress occurs, cautiously take off the no-buy restraint.

Last of all, always be paranoid and on the lookout for scams. It’s a sad reality that daunts any PSI looking for a solid investment. Ironically, be suspicious of any recent start-up company that does NOT have a steady rate of dilution. Question where it is that they got their financing from rather than assuming a miracle. In such situations, never get caught up with the fantastic news being poured out when there are many loose connections entailed in the story backing it.