How to quickly read S-3s and 8-Ks without falling asleep. (Post 21/45)
(If you are interested in my past posts please f o l l o w m e !)
Welcome to post 21.
In the previous post, we went over Low Float vs. Micro Float. How the number of available shares determines the extent of the volatility in a particular stock and why so many traders are caught off-guard by a micro float.
Let's get to the mundane, tedious part.
Reading. Specifically, SEC filings.
I know. You already feel as if you've seen a million movies on television. But if you are investing your real money in penny stocks without first reviewing the filings, it's not a trade. You're simply throwing your dimes into the stock market.
Now let's be perfectly honest for a minute. In general, these are all pure crap. Are not able to earn real cash. How do they generate electricity? By allowing a sale of newly issued shares. To you.
No business or corporate law degree necessary to read this stuff. It's not necessary to read the entire 200 pages. All you have to do is see two forms before you click the buy button.
First, the 8-K.
This is the form of the “material event”. The news. If a penny stock suddenly stops, or tears apart by 50% from nowhere, then it's likely an 8-K dropped. It may be a new contract, an acquisition or a notice of delisting. Don't go on social media "pumpers" to find out what the news is. Read the true 8-K. That can take as little as 2 minutes to scan the summary at the top and you know exactly what the company is doing.
Then, there's the widow-maker. The S-3.
This is a shelf registration! In essence, it's the firm submitted court documents to create millions of new shares and sell them to the open market at any time.
If a stock has a hard-squeeze situation with a pending S-3 on file? Be incredibly careful. The only thing they're waiting for is for the price to rise high enough so that they can dilute the float and sell their shares to finance their own operations.
The explosion in supply comes as the new shares hit the market. The demand is smashed. The price collapses. The momentum dies. And retail traders end up with the short straws. Again.
It is not necessary to read all of the pages. Simply employ any free scanning software for filing. Please refer to an 8-K for catalyst confirmation. Look out for an S-3 to identify the dilution trap.
Next meeting with the next post as this.
(Quick description of the above: This post explained how to quickly skim SEC filings without falling asleep.) We discussed the importance of reading an 8-K to understand the true reason for a move, and the fact that a "live" S-3 filing is a huge red flag for unexpected dilution that can run a penny stock's momentum right out the window.