There are a million and one types of guides out there that can promise to make you a millionaire by using them to invest in Penny stocks. Just like many of the other “get rich quick schemes” however, I would suggest learning how to work the penny stock market the same way you try to learn how to do anything else. Just like learning how to start computer programming, how to play basketball, how to manage your debt using low interest credit cards, or even how to play a musical instrument – the best way to learn the idea and master the penny stock market is by trial and error. The only problem with doing too much trial and error with the stock market however is that it can put you in a large whole faster than 3 straight days of playing Black Jack at the casino (if you are having a rather lucky streak that is).
This article will help you learn about how the world of penny stocks can turn upside down within a day, and will also educate you on investing in companies that have filed Chapter 11 bankruptcy, as well as are on the OTC (over the counter market).
First of all, What is Chapter 11 Bankruptcy?
Chapter 11 bankruptcy is not exactly the same as your formal bankruptcy (something like Chapter 7 bankruptcy), where all of the company’s assets are liquidated and then given to the creditors. In fact, chapter 11 bankruptcy is completely different, and it is sometimes referred to as “reorganizational bankruptcy.” Chapter 11 bankruptcy allows a company to keep its assets, so that they make money on them in the future by first restructuring its foundation, business, and debt. Companies usually file for Chapter 11 bankruptcy when it still makes a lot of sense to hold on to their assets. Here are some basics to Chapter 11 bankruptcy:
- refers to a section of the U.S. bankruptcy law
- companies are allowed to restructure debt
- Individuals, Companies, or Partnerships can file for Chapter 11 Bankruptcy
- submitters are required to submit a plan of reorganization
- very often unable to meet the listing standards of the NASDAQ or NYSE
Food for thought when thinking about investing in a company’s stock – one that has filed for this type of bankruptcy:
- See where the company stands with its current debt
- Find out as much as possible in regards to the companies reorganizational plan
- Does it look like the company is going to reorganize successfully or is it going to liquidate despite filing
- Is the company soon going to be bought out by a parent company?
Remember that stockholders of a company that have filed for this type of bankruptcy usually only receive any type of value when all of the claims of the companies secured and unsecured creditors have been satisfied (when the company finds a way out of debt). A good rule of thumb to use is to only invest in these types of situations when Asset Sales < Debtor’s Chapter 11 Administrative Liabilities.
Real Life Examples
There have been many companies that have filed for Chapter 11 bankruptcy. Many big names like the Chicago Cubs, Chrysler, Delta Airlines, and even Marvel Comics have all filed at one point. A company that recently underwent a lot of scrutiny for the way it operated in the stock market was BlockBuster.
Blockbuster filed for Chapter 11 bankruptcy in 2010, and in April of 2011 it sold almost all of its assets to DISH network for $320 million. Just as recently as this last September (2011) – BlockBuster was looking like the newest and coolest thing to be buying in the Stock market. The stock was rising at high percentage rates each day for a considerable amount of time – and people that got in and out early made a killing of buying and selling these penny stocks.
Here’s why the buzz was so big in early September:
- Netflix, Blockbuster’s main source of competition, had recently up their prices and split the company in two – dividing it between their mail-in service, which they then named Qwikster and their online streaming service which remained named Netflix. They also raised their prices. This infuriated approximately 1 million users that ended up unsubscribing (more than Netflix foresaw doing so) and their stock dropped 50%. The door seemed open for BlockBuster.
- Right around the same time – Blockbuster and Dish Network leaked that were going to announce the most comprehensive streaming service to ever hit the market. That video can be seen here.
- BlockBuster stock was amazingly cheap, and it seemed crazy NOT to invest. With stock prices at $0.03 a share (that later rose to $0.32 in the same month) why would you not buy?
Unfortunately, that “most extensive streaming service of all time” turned out to be useful only if you were already a subscribing member to DISH network. It had nothing to do with Blockbuster’s online streaming service – which is what many people were hoping for. On top of that, the company’s stock totally disappeared. It was liquidated, and now exists as BLIAQ, and equity owners were reduced to owning virtually nothing.
Blockbuster is the prime example of how trading beginners can get burned in penny stocks. Everything looked good, and there was a lot of hype about the stock, but if you do your research you can see past all of that. So be careful when you are investing in companies that have filed for Chapter 11 bankruptcy because you never know what you are going to get.
This article was written by Philip R. Philip is a computer programmer and part time trader. In his spare time he likes to write about the stock market – as well as tech stuff like SEO (search engine optimization) and computer programming.