We now discuss what makes reverse merger stocks move so violently and so fast. Why can you make such huge profits if you find the right stock pre-merger?
Most such shell stocks haves market capitalizations of $250,000 – $2 million. The exact value of a such a shell company is hard to estimate and varies greatly, but some factors are clearly important.
These factors are important because they entice and are valuable to the operating company that is looking to go public by merging with a reverse merger shell. The volume of trading in the stock is important, as it is easier to raise money with more volume in the stock. This is because investors who put money into the company privately are eventually looking to take profits by selling. The more volume, the easier it is to sell. Similarly, the more shareholders in the stock, the more attractive the shell is, for much the same reason. If there are any assets in the shell, naturally that will increase the value of the shell.
Now consider a hypothetical shell merger where the shell has a market value, a market capitalization, of $500,000 and the operating company, when merged in, will have a market value of $10 million. Naturally, the operating company will wind up with most of the stock, let’s say 80% of the stock in the combined company. This means that the public shell pre-merger shareholders will now have 20% of a company worth $10.5 million. Twenty percent of $10.5 million is $2.1 million. That means that the shareholders in the reverse merger shell company paid $500,000 for stock that is now worth $2.1 million = more than 400% appreciation gained with the stroke of a pen.
This, in a nutshell, is why reverse merger stocks can jump overnight and offer what I consider to be the highest ROI potential of any type of investment out there. If you want to know more, I recommend my “How to Find Hot Reverse Merger Penny Stocks” on Amazon.com.
We all know, naturally, that such stocks are high risk and are to be traded only with your racetrack money, but most of these stocks have relatively low market capitalizations and have announced that they are looking for deals. Typically, their stocks are drifting lower, giving the careful speculator a chance to buy that he will not have when the deal is done. Yes, a stock that has a soft stock price and low volume is boring to many, but as we used to say on Wall Street: “Never go short a dull market.”