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The Dilution of HMNY: What You Need to Know

Dilution is a powerful weapon in the stock market and the dilution of HMNY is wreaking havoc on the share price.  Dilution is legal and you don’t always see it coming.  MoviePass parent HMNY is a prime example of what dilution can do to a company’s stock price.  The other week when HMNY dropped below $0.10 per share the data being provided was there was only 1.7 million shares available, at a price of $0.06, the market cap (or valuation) was around $100,000.  That’s it!  The price of a high end car.

Most penny stocks have valuations of more than $1 million.  The fact that only 1.7 million shares were available was what brought my attention to this stock and what made me think it was a good buy.  Since then the company has released more data including the very useful share count; remember, we thought it was 1.7 million.

On 8/15 HMNY released a report, you can read it here.  They went from 1.7 million shares outstanding to 636.9 million shares!  You can do the math but I’ll save you the time.  That’s a 37,365% increase in shares!  Let that sink in, over 37,000%!

Economics 101

I strongly believe that much of the way we look at economics is fundamentally flawed.  However, that is another discussion for another day.  The basic underlying principles of supply and demand are, from everything we can tell, accurate.  So for this post, we will assume that the laws of supply and demand as you learned them in high school are unchanged.

More buyers than sellers, in other words, more demand than supply will push the price of a good up.
More Sellers than buyers, or more supply than demand will push the price of a good lower.

Let’s consider some real world examples.  When a sports team makes the playoffs, the tickets typically sell out very quickly.  The demand for tickets many times vastly outweighs the supply.  This drives the price of the tickets up.  If you want to see the game and you didn’t get tickets from the box office before they sold out, you will have to purchase from someone else on Craigslist or StubHub and pay more than the original price.  The demand is higher than the supply so the price goes up.  This demand can cause a $300 ticket to sell for over $1,000.

When supply exceeds demand, the price will drop.  Consider a pair of designer jeans, bought new from a department store they might cost $250 or more.  At the end of the season the leftover inventory will go to discount retails like TJ Maxx, Ross or outlet stores.  The surplus supply of jeans is sold at a discount, usually under $100.  This surplus supply will drive the price down.

Supply & Demand and the Stock Market

Stocks are just like everything else that we buy and sell, the same rules of economics apply to them in real time.  More demand will drive prices up, more supply will drive prices down.  Typically, most big companies we hear about don’t buyback or sell more shares.  But this problem plagues many penny stocks.  One of the biggest reasons people don’t trust penny stocks is because the owners of the company can dilute the share holders by supplying too many shares to the market.  This will eventually drive the price down.

Companies sell shares to raise cash to make investments or cover operating expenses.  HMNY is burning cash much faster than they are bringing it in.  With the unstable business model it is unlikely they will be able to get a loan to help them stay afloat.  They have shares of their own stock and they are selling them as fast as they can.  This is how the supply went from 1.7 million to 636.9 million in just a few weeks.  HMNY sold 635.2 million shares to help cover operating expenses.

This selling “diluted” the market and made the existing shares less valuable, just like the designer jeans.  The last few weeks as tens of thousands of traders and investors rushed in to buy up what looked like discount shares, HMNY was selling them as fast as they could, which kept the price from rising and actually pushed the price lower.

The Dilution of HMNY

The management at HMNY diluted the shareholders’ current stake and made everyone’s shares worth less.  However, if they did not sell these shares they could become insolvent which would make their shares worthless, truly worthless, $0.000000.

When I decided to buy some shares it was truly a gamble.  I might lose the entire amount I invested or I might make a handsome profit.  No one knows for sure, anyone that tells you different is lying to you.  This stock is a gamble plain and simple.  With BIG risk can come BIG REWARDS!

 

Thanks for reading and happy trading!  If you have any questions please post them below.  Don’t forget to follow me on Twitter for all trades live!

The Secret Sauce: What it Takes to be a Winning Trader

We all have aspirations of buying into the next Apple or Amazon for a few dollars or even pennies a share.  The problem is the waiting, we all want that return tomorrow.  Take a look at the charts for Amazon and Apple below; a $10,000 investment 15-20 years ago would make you a millionaire now.

I want you to understand something right now, no one knows what a stock will do tomorrow.  Apple is an industry leader with revolutionary products.  One of Apple’s most successful products was the iPod.  It’s mostly obsolete now but they were all the rage in the early 2000’s.  Do you remember the Zune?  That was Microsoft’s competing product, it was a total flop.  Had the Zune become the dominant product, Apple might never have achieved all the success that the iPhone and iPad have brought it.

AAPL was able to build off its success and start the smartphone as we know it today.  Without that initial success of the iPod, we might only remember that AAPL built the first personal computer  then competed with HP and Dell in the personal computer market.  Instead, we have a revolutionary company that leads the tech sector in innovation.

One more thing to note on these charts, look at the dips that occur as the stock price rises.  Some of the dips are 10-15%.  Not everyone has the nerve to ride this roller coaster for this long.

Investing vs Trading

The INVESTMENTS in Amazon and Apple could have brought you fortune if you were able to accurately predict the future 15-20 years ago and had the discipline to hold the stock even during down times.  Trading is very different than investing.  While both are essential parts of the market, but they have very different requirements.  Investing requires patience and diversification.  Trading requires you to be able to gauge reactions in the short term.  The topic of trading v. investing is more complex and I have addressed it further here.

Ok enough is enough, I promised you the secret to profitable trading.  I can bore you all day with definitions and charts.  What does it take?

The Winning Trader

Nothing worth having in life comes easy or fast.  So if you are expecting to stand on your left foot and jump three times and trading success will arrive please stop reading and find another scheme.  The secret to being a winning trader is experience.  Not a special formula or chart overlay.  No amount of artificial intelligence or reading will make you a winning trader.  If you want to learn to trade and get good at it, you must start trading!  That’s it!  Simple right?

Simple, yes, but long, tedious and excruciating.  You will lose money at some point, guaranteed; maybe not your first trade and maybe not in your first week.  The key is to manage your money and manage your risk.  Managing those two items takes, you guessed it, experience!  Before starting this journey I read Toni Turner’s A Beginner’s Guide to Day Trading (follow the link to get a copy for yourself).  She spent the first 4 chapters talking about the mental game of trading.  It wasn’t until chapter 5 that she discussed actual trades and actual stocks.

Trading is a very emotional game and if you have read enough of my earlier posts, I have plenty of tales to tell about losing money when I let emotion get in the way.  You must condition yourself to detach from the trades.  Forget that the money you are trading with is real and your own.  You must concentrate on making good trades and then you will become a profitable and winning trader.  The discipline is only achieved with experience.

Your Next Step

Start trading!  Open a FREE account with Robinhood and start trading for free!  The money is real but they don’t charge any commissions.  I have a full review of the platform here.  Follow this link and when you sign up and make your first deposit you will receive a free share of stock!  What better to start off you trading endeavor than with a guaranteed profitable move?

Thanks for reading and happy trading!  Follow this blog for lots more insights and lessons.  Follow me on Twitter for live trades.