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Penny Stocks-Timothy Sykes Millionaire Challenge

The Dangers of Penny Stock Dilution and Stock Pumps

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Written by Timothy Sykes
Updated 1/3/2023 14 min read

Every trader needs to understand penny stock dilution and why stocks get pumped. Too many newbies trust the pumpers and lose their hard-earned money. Worse, they walk away feeling cheated.

Then they think penny stocks are bad. But it’s all part of the game. You just need to know…

Why Penny Stocks Get Pumped

99% of penny stock companies fail.

If the companies all fail, why do they exist? Are they small companies trying to create great products? Or do they exist to sell shares?

I’m not here to make those judgments. Nor am I here to say what’s legal and/or ethical. My goal is to educate you about what actually happens.

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Most of these companies couldn’t stay in business if they didn’t raise cash regularly. And many of them have no revenue. So they start issuing press releases galore. If the ‘news’ is good enough, maybe the stock runs.

But if the stock gets pumped on Twitter, StockTwits, or WhatsApp, it can really spike. When it does spike … that’s when the action behind the smokescreen happens.

How do they do it? An offering or financing. The end result is penny stock dilution.

What Is Penny Stock Dilution?

Penny stock dilution is when a nano- or micro-cap company issues new shares into the market. For example, say a company has a float of 10 million shares. If they sell two million new shares into the market, the new float is 12 million shares. Easy, right?

But what about market capitalization? If the stock’s price was $1 per share before the offering, the market cap is $10 million. All things being equal, the market cap would still be $10 million after the offering.

What does that mean for the value of a share? Putting it bluntly, it drops. That $1 stock is now worth roughly 83 cents per diluted share.

Here’s how it works…

What Is a Shelf Offering?

A shelf offering allows a company to raise money any time within three years of the registration. It’s perfectly legal and permitted by the Securities and Exchange Commission (SEC).

Effectively, a shelf offering is pre-registration of equities with the SEC. For U.S.-based companies, the filing is an S-3. For foreign-based companies trading U.S. equity markets, it’s an F-3. It provides details like the number of new shares and the total dollar amount of the offering.

But one of the most important things to know about shelf offerings lies in the name…

Shelf Offering: Put It on the Shelf Until We Need It

The shelf offering lets the company put the shares on the shelf.

Again, the company has up to three years to introduce the new shares into the market. This keeps the company from having to re-register. It also saves the company from incurring penalties if it issues shares to raise cash in a hurry.

Also, if the company doesn’t sell all the registered equities within three years, it can roll them over. It only needs to file an updated S-3 or F-3. It happens often.

Why would the company want to wait? So it can get the best price for the new shares. When a company sells shares into the market, it dilutes the shares, right? So it’s in the company’s best interest for the share price to be as high as possible before they sell.

Enter the pumpers…

How Penny Stocks Get Pumped

Let me say up front … I’m not against the pumpers. But it’s my job to educate you. My problem with pumpers is that they’re not telling the whole story. They’re saying things like…

“This one is going to the moon!” Or … “The new technology will change the world!” Or … “The company is about to sign a big contract!”

What most newbies don’t understand is … that kind of hype isn’t new.

Learn From the Past

In the past, promoters used boiler room marketing calls at dinnertime. (Think “Wolf of Wall Street.”) They also used emails, postcards, and other direct mail.

They even used to send out DVDs in the mail. These glossy marketing packages enticed financially uneducated people to buy stocks.  But it was all BS promotion of sketchy, unprofitable companies.

Then a few years back, the SEC cracked down. They made it a lot more difficult for the pumpers. They forced the…

Evolution of the Penny Stock Pump

Now the pumps happen in different places using different media. Gone are the days when you got the 6 p.m. call from the boiler room scammers.

Now it’s done on Twitter or StockTwits. There are WhatsApp, Discord, and Telegram group chats. And you still see email promotions. But the list owners have to disclose marketing arrangements in the emails. So they’re not as effective.

The most important thing to understand is…

It’s the same message using different media.  

Let’s look at an example of a pumped stock. I’ll show you what to look for and where to find it.

[Fair disclosure: I’m not accusing the company of wrongdoing. It appears to be in compliance with SEC rules. This is an example of what happens when a shelf takedown happens.]

Kitov Pharma Ltd (NASDAQ: KTOV)

Kitov Pharma Ltd is a development stage biopharmaceutical company based in Israel. The company filed an F-3 on December 12, 2019. Remember, an F-3 is the same as an S-3, but it applies to foreign companies.

From the F-3, it’s not clear how much cash the company could raise. You can find that number in an F-1 filing from December 27, 2019. The proposed max amount was $35 million. How does a company determine that number? It’s calculated, at least in part, based on the company’s market capitalization and public float.

Watch this video for more on how to read SEC filings:

How to Read SEC Filings (Live Trading)

The SEC has rules about how the S-3/F-3 shelf offering works. The document explaining it is 70 pages long. I won’t bore you with details, but the simplified version is…

Baby Shelf Registration: Rule I.B.6

General instruction I.B.6 restricts any company with a market cap below $75 million. It can use the S-3 to register and then sell new securities. But it can only sell new shares equal to one-third of its public float in a 12-month period.

(Note: at the time of writing, KTOV’s market cap is well above the $75 million threshold. That means it’s not subject to the Baby Shelf Rule right now.)

If you really want to dig deep, get my DVD “Read SEC Filings.” It features Trading Challenge mentor Michael Goode. Michael and I simplify the process so SEC filings are understandable even for beginners.

Again, new shares introduced into the market creates penny stock dilution. The Baby Shelf Rule allows small companies to raise cash. But it also protects investors from companies selling too many new shares.

Here’s how the KTOV offering played out…

What an Offering Looks Like On a Chart

First, take a look at the KTOV six-month chart:

KTOV stock chart 6 month time frame
KTOV chart: 6-month, daily candle, shelf registration and penny stock dilution — courtesy of StocksToTrade.com

Notice the low in March 2020. That big gap down happened after another offering the company used to raise $6 million. Now look at the big red candle on the right.

Here’s the KTOV intraday chart represented by that candle…

KTOV june 23 chart
KTOV chart: June 23 intraday, registered direct offering — courtesy of StocksToTrade.com

See the huge red candle on the chart? That’s when the company announced a $35 million registered direct offering. The same offering found in the December 2019 F-3 and F-1 filings.

KTOV bounced back after the offering — and as I write it’s still getting pumped on social media and in chat rooms. The promoters are doing a good job. Like I wrote in “The Truth About Promoted Penny Stocks,” not all promoted stocks completely crash right away.

How Do You Know When a Stock Gets Pumped?

A lot of people were asking me why I wasn’t buying KTOV. After all, it was uptrending. It had two green days and gapped up twice. It was still green on the day. But it was easy to see by using the…

StocksToTrade Social Media Search Tool

It was getting pumped on Twitter and in chat rooms. If you want to see it, use the StocksToTrade social media search tool and scan for KTOV. Start reading through tweets and find those that say things like…

  • “It’s not a loss until you sell!” Or…
  • “This penny stock is the future and will change the world.” Or…
  • “I’m in love with this company!”

If it sounds too good to be true, it is. 

StocksToTrade Breaking News Chat

The Breaking News chat is my new favorite tool. It’s run by a couple of very experienced traders who constantly scan for breaking news that can move low-priced stocks.

Using StocksToTrade makes it easy for me to see when a stock is getting pumped that way. Use it. Add the Breaking News chat to your subscription. I attribute it to over $100,000 in profits so far this year.**

(**My results are not typical. I have exceptional knowledge and skills developed over time. Most traders lose money and trading is risky. Do your due diligence and never risk more than you can afford.) 

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Back to KTOV…

Volume picked up as it got pumped from the $0.40s. But it was the third green day. I prefer the first green day setup.

After it tanked people started asking, “Tim, how did you know?”

I didn’t. But I’ve been doing this for over twenty years. This kind of run is nothing new. It’s the same as the old school pumps except for how it’s getting pumped.

Again, I’m not here to judge legalities or ethics. These stocks fit predictable patterns. I recognize the patterns and trade them.

Which brings me to you. Because stocks do get pumped. Now you’ve seen an example, what should you do?

Learn to Trade the Volatility

Some people ask why I don’t expose the pumpers. First, they pop up like weeds. I couldn’t begin to expose them all. Second, it doesn’t do me any good to expose them. I trade the volatility they create.

The best way to protect yourself from getting suckered by the pumpers is to educate yourself. Education is the key.

You can access my no-cost “Volatility Survival Guide” to start preparing.

It’s sad and sickening to see newbies get lured in by pumpers. I try to warn them. Then they attack me because they really want to believe the pumpers. They want to believe the investor relations call. And they want to believe this time they’re getting in on the ground floor.

My job is to educate people. Again, I’m trading predictable patterns. I’m grateful for every play and every pumper. But I feel bad for people going down with the ship.

So learn to trade the volatility. But also expect the worst and you’ll never be disappointed.

Learn More About Penny Stock Dilution and Stock Pumps

Nothing I’ve written here is revolutionary. I didn’t create the rules about offerings, and I didn’t create the patterns. Penny stock dilution and stock pumps have been happening for years. I’m here to teach them. (Here’s why I teach.)

Most traders lose money due to lack of preparation. They trust the stocks. Or they trust the pumpers. Some want to get an education but find a so-called guru who uses their chat room for their own profit.

My trading profits in 2020 go to charity — not in my pockets. Why trade if I’m not keeping the money? I teach by trading. This is a beautiful thing. It’s a repeatable process, but you have to learn it.

To learn my process you have to learn the rules and my mindset. So my trades help you learn the process. And my conservative way of trading can work — if you put in the time and effort required to learn the nuances.

Trading Challenge

It’s not just about picking good stocks or companies with world-changing products. There are so many nuances that influence stock prices. At first, it can seem a little overwhelming.

That’s why you need to get in the Trading Challenge. What’s in it for you?

  • Hundreds of hours of archived webinars — so you can learn from the past.
  • Two to four live webinars each week. Ask me questions. Ask Trading Challenge mentors questions. It’s the perfect opportunity to learn different strategies and styles.
  • Over 6,000 video lessons. (New lessons are added each week.) Learn my mindset as I break down specific trades.
  • Hundreds of hours of DVDs. This is where you’ll learn trading basics.
  • Access to (in my opinion) the best chat room on the planet. This is where you’ll learn the nuances in real time. Students help each other understand the game. Moderators answer questions. It’s incredible.

Apply for the Trading Challenge today. Fair warning: not everyone gets accepted. Come ready to study.

What do you think about this post? Did you already know about penny stock dilution and stock pumps? Comment below, I love to hear from all my readers!

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”