Exploring the Journey of a Penny Stock Going Public

Many people perceive penny stocks as a risky investment, but the truth is, a penny stock can become a promising opportunity for investors. The concept of a penny stock going public is not as uncommon as it might seem, and the journey itself can lead to significant returns for those who invest wisely.

Understanding Penny Stocks

Let's start with some basics. When we discuss whether a penny stock can go public, it's important to clarify that penny stocks are already 'public.' These stocks are traded on over-the-counter markets, exchanges, or automated quotation systems. Conventional penny stocks, which trade below $5 per share, meet the criteria for being publicly traded securities as they meet the requirements set by the Securities and Exchange Commission (SEC).

A penny stock can be any stock that is considered to be a microcap or small-cap stock, but the term often carries a negative connotation due to the higher risk and price fluctuations. However, if these stocks are backed by promising ventures and successful business plans, they can offer substantial returns to investors.

The Difference Between IPO and Becoming a Penny Stock

When discussing a penny stock going public, it often refers to a company that was previously privately held and has recently issued an Initial Public Offering (IPO), making its shares publicly available. Conversely, a company that was a penny stock and has since seen its stock price increase significantly can be considered a 'penny stock now,' not because it went public, but because of market conditions after it was initially issued.

The Role of Market Makers

The behavior of a penny stock often depends on the availability of a market maker. A market maker is a broker-dealer who buys and sells stocks at agreed-upon prices, ensuring liquidity in the market. When a penny stock is not actively traded, a market maker can be crucial for making the stock more accessible to investors.

In the early stages, a market maker might publish a 'pink sheet' listing bid and ask prices. For example:

ABC Corp - Bid 0.10 Ask 0.30.

This would prompt salesmen to promote the stock as a potential investment opportunity. The market maker typically asks for a commission, such as 50 cents of the share price, for their services.

While the stock might be considered practically worthless, it still offers potential for growth. For instance, a junior mining company that discovers gold or a startup that gets acquired could drive the stock price upwards. This is where the market maker hopes to recoup its investment and potentially make a profit.

The IPO Process and Its Requirements

However, a company cannot just decide to go public. They must adhere to certain standards set by exchanges such as the New York Stock Exchange (NYSE) or NASDAQ. The NYSE requires a minimum price, market capitalization, and a certain number of outside directors. NASDAQ is more flexible but still imposes its own set of criteria.

In many cases, a company might go public to raise funds, only to struggle with operational and financial challenges. For instance, a company might be undercapitalized and need to secure more capital. If it fails to meet the listed exchanges' criteria for continued listing, it could be delisted. This is where the role of a market maker becomes crucial.

Markets and economies change. A company that once had an IPO at $0.30 per share might find itself in a dire financial situation, making its shares practically worthless. However, the market maker can still offer these shares to maintain liquidity in the market. This is why the presence of strong market makers is essential in the world of penny stocks.