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Trading Trip-Zero Penny Stocks
An art form in the depths of the Penny Stock market...
Trip-Zero Penny Stocks are often the rage of the penny market, garnering hype and a following that is almost unbelievable. Why do these stocks have such a lure to traders? What is the potential behind Trip-Zeros? What are the dangers? We'll try to answer all of these questions and more in this special feature, and help those looking to trade these stocks have a better chance of winning! To make a suggestion for an addition, please email us.
What is a “Trip-Zero” stock?
A trip-zero stock is a penny stock which has a price that includes a decimal point, followed by three – ‘trip’ – zeros, and then a single digit. Because the lowest share fraction tradable by a retail investor is .0001, the lowest a stock can go is just the same, .0001 dollars. So, a trip-zero stock can be anywhere from .0001 to .0009. After that the stock no longer has three zeros, and simply becomes a “sub-penny” or “subber”. Ok, now let’s just try to comprehend what .0001 dollars really means. It is one ten-thousandth of a dollar, or... perhaps a little easier to grasp, one one-hundreth of a penny. Chop a penny into 100 little pieces, as shown below, and you can buy yourself one whole share of a .0001 stock with just one piece!
How does a stock get to .0001?
So you may be asking yourself, “How the heck does a stock go this low?” Well, the answer to that depends on the stock, but generally it is due to dilution, and the subsequent supply of shares outpacing the demand for them. If nobody is willing to buy the stock, and the selling continues, the stock goes down down down, all the way to .0001… and then, when nobody is willing to buy, not even at .0001, the bid disappears. These are “no-bid” stocks, and typically their asking price, or offer, then becomes .0001.
So why would anyone want to buy a Trip-Zero stock?
It's all about the up-tick...
After hearing this story of dilution and never ending spiral to .0001 with no bid, you may be totally writing off the trip-zero stock. If you are looking for a safe investment, then that is your best bet. Stay far, far away. However, the lure and potential of these stocks lies back with the basic stock market rule mentioned above. If the lowest share fraction tradable by a retail investor is .0001, then that is also the smallest price increase that a .0001 stock can have. So if you buy the stock at .0001, and the price goes up just one tick to .0002, you’ve just doubled your money! This is the potential, the leverage, behind these trip-zero penny stocks. Of course, as the price gets closer to .0009 that leverage decreases exponentially. However, it still offers incredible percentages in gains. Also, if a trip-zero stock starts running from .0008, for example, it may go on to hit .0019 or more, just as easily as a .0002 stock would go to .0004. Now, Imagine if you were able to catch a real runner, grabbed shares at .0001 and were able to sell them at .0010. That’s a 900% profit, or a “10-Bagger”. Every so often it happens, and that is the golden lure behind these stocks.
Now, the fact that you cannot trade in between the ticks is the reason these Trip-Zeros have this potential. At the same time it makes it difficult to sell them because you can't work in between the spread. That is, you can't offer the shares you bought at .0001 for 'just under .0002' and beat the other sellers to the punch. You have to get in line at .0002, or .0003 and so-on, and wait for your sell to execute. With a stock that is running up to .01, for example, you could put in your sell at .0099 and beat those sellers lined up on the .01 ask. More on this below...
Trip-Zero Profit/Loss Potential Chart
What is so dangerous about Trip-Zero’s?
Selling is the hard part...
So you might be thinking, “What’s so hazardous about a .0001 stock? It can’t go any lower.” Well.. that’s not really true. First of all, if the stock has no bid and you buy at the ask of .0001, you’ve immediately assumed a 100% loss. Why? Because, with no bid, you couldn’t even sell the stock readily if you wanted to. Remember, you can’t sell it for less than .0001. So, to simply get out of your position even, you’d have to put your sell in at .0001, and hope your shares are bought up by someone else. Now the issue with this is you are now at the very back of a long line of people trying to sell shares for .0001. That’s the way the market works. Orders sent to a particular market maker get filled first come, first serve, and if you’re at the back of a long line, you are going to be waiting until the last of the shares offered at .0001 - yours - are bought. Once in a while you might get lucky depending on what market maker your broker uses. Say you use E*TRADE, which has its own Market Maker (ETMM), and you are the only one trying to sell shares through ETMM at .0001. If a fellow Etrader comes along and decides to buy shares, they will most likely match your orders and you’ll get filled before the line of people waiting behind NITE or AUTO. Chances are, your market maker already has a bunch of orders queued, but every now and then this might work to your advantage.
Beware of the Reverse Split
There is yet another way your .0001 investment could dwindle to oblivion. If a company can no longer drive demand for their stock, and cannot get it off the metaphorical .0001 “floor”, their only recourse is the dreaded Reverse Split. A Reverse Split, or RS, if you don’t know already, reduces the number of shares outstanding while simultaneously raising the share price at the same ratio. If they enacted a 100:1 RS, and you had a million shares at .0001, you would be left with ten thousand shares at a price of .01. The share price goes up, (to dilutable levels…) but you are left with fewer shares. The problem with reverse splits is they are seen as the worst possible event in the penny stock world, and almost always lead to a massive selloff when they're announced, and then often once they are executed. In the aftermath the stock you own that started off at .01 post split, might settle at .0035 or so. You’re left holding onto a 65% loss, but the company is left with 35 ticks of share price to dilute… Trip-zero stocks have the highest risk of reverse splits because it is usually the company's only option to continue 'utilizing' the stock, and most trip-zero stocks didn't get there from solid management and profitable business plans. Many are scams and dilution schemes that will dilute to oblivion, reverse split, rinse and repeat.
So how does one maximize their chances with a Trip-Zero?
To pull off a successful trip-zero trade, here are some tips and rules to consider following:
Last Updated: 11/17/11