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Trading Trip-Zero Penny Stocks

An art form in the depths of the Penny Stock market...

Trip-Zero Penny Stocks are often the rage of the penny market, garnering hype and a following that is almost unbelievable. Why do these stocks have such a lure to traders? What is the potential behind Trip-Zeros? What are the dangers? We'll try to answer all of these questions and more in this special feature, and help those looking to trade these stocks have a better chance of winning! To make a suggestion for an addition, please email us.

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What is a “Trip-Zero” stock?

A trip-zero stock is a penny stock which has a price that includes a decimal point, followed by three – ‘trip’ – zeros, and then a single digit. Because the lowest share fraction tradable by a retail investor is .0001, the lowest a stock can go is just the same, .0001 dollars. So, a trip-zero stock can be anywhere from .0001 to .0009. After that the stock no longer has three zeros, and simply becomes a “sub-penny” or “subber”. Ok, now let’s just try to comprehend what .0001 dollars really means. It is one ten-thousandth of a dollar, or... perhaps a little easier to grasp, one one-hundreth of a penny. Chop a penny into 100 little pieces, as shown below, and you can buy yourself one whole share of a .0001 stock with just one piece!

.0001 Trip-Zero Value

How does a stock get to .0001?

So you may be asking yourself, “How the heck does a stock go this low?” Well, the answer to that depends on the stock, but generally it is due to dilution, and the subsequent supply of shares outpacing the demand for them. If nobody is willing to buy the stock, and the selling continues, the stock goes down down down, all the way to .0001… and then, when nobody is willing to buy, not even at .0001, the bid disappears. These are “no-bid” stocks, and typically their asking price, or offer, then becomes .0001.

So why would anyone want to buy a Trip-Zero stock?

It's all about the up-tick...

After hearing this story of dilution and never ending spiral to .0001 with no bid, you may be totally writing off the trip-zero stock. If you are looking for a safe investment, then that is your best bet. Stay far, far away. However, the lure and potential of these stocks lies back with the basic stock market rule mentioned above. If the lowest share fraction tradable by a retail investor is .0001, then that is also the smallest price increase that a .0001 stock can have. So if you buy the stock at .0001, and the price goes up just one tick to .0002, you’ve just doubled your money! This is the potential, the leverage, behind these trip-zero penny stocks. Of course, as the price gets closer to .0009 that leverage decreases exponentially. However, it still offers incredible percentages in gains. Also, if a trip-zero stock starts running from .0008, for example, it may go on to hit .0019 or more, just as easily as a .0002 stock would go to .0004. Now, Imagine if you were able to catch a real runner, grabbed shares at .0001 and were able to sell them at .0010. That’s a 900% profit, or a “10-Bagger”. Every so often it happens, and that is the golden lure behind these stocks.

Now, the fact that you cannot trade in between the ticks is the reason these Trip-Zeros have this potential. At the same time it makes it difficult to sell them because you can't work in between the spread. That is, you can't offer the shares you bought at .0001 for 'just under .0002' and beat the other sellers to the punch. You have to get in line at .0002, or .0003 and so-on, and wait for your sell to execute. With a stock that is running up to .01, for example, you could put in your sell at .0099 and beat those sellers lined up on the .01 ask. More on this below...

Trip-Zero Profit/Loss Potential Chart

Trip-Zero Profit and Loss Potential

What is so dangerous about Trip-Zero’s?

Selling is the hard part...

So you might be thinking, “What’s so hazardous about a .0001 stock? It can’t go any lower.” Well.. that’s not really true. First of all, if the stock has no bid and you buy at the ask of .0001, you’ve immediately assumed a 100% loss. Why? Because, with no bid, you couldn’t even sell the stock readily if you wanted to. Remember, you can’t sell it for less than .0001. So, to simply get out of your position even, you’d have to put your sell in at .0001, and hope your shares are bought up by someone else. Now the issue with this is you are now at the very back of a long line of people trying to sell shares for .0001. That’s the way the market works. Orders sent to a particular market maker get filled first come, first serve, and if you’re at the back of a long line, you are going to be waiting until the last of the shares offered at .0001 - yours - are bought.  Once in a while you might get lucky depending on what market maker your broker uses. Say you use E*TRADE, which has its own Market Maker (ETMM), and you are the only one trying to sell shares through ETMM at .0001. If a fellow Etrader comes along and decides to buy shares, they will most likely match your orders and you’ll get filled before the line of people waiting behind NITE or AUTO. Chances are, your market maker already has a bunch of orders queued, but every now and then this might work to your advantage.

Beware of the Reverse Split

There is yet another way your .0001 investment could dwindle to oblivion. If a company can no longer drive demand for their stock, and cannot get it off the metaphorical .0001 “floor”, their only recourse is the dreaded Reverse Split. A Reverse Split, or RS, if you don’t know already, reduces the number of shares outstanding while simultaneously raising the share price at the same ratio. If they enacted a 100:1 RS, and you had a million shares at .0001, you would be left with ten thousand shares at a price of .01. The share price goes up, (to dilutable levels…) but you are left with fewer shares. The problem with reverse splits is they are seen as the worst possible event in the penny stock world, and almost always lead to a massive selloff when they're announced, and then often once they are executed. In the aftermath the stock you own that started off at .01 post split, might settle at .0035 or so. You’re left holding onto a 65% loss, but the company is left with 35 ticks of share price to dilute… Trip-zero stocks have the highest risk of reverse splits because it is usually the company's only option to continue 'utilizing' the stock, and most trip-zero stocks didn't get there from solid management and profitable business plans. Many are scams and dilution schemes that will dilute to oblivion, reverse split, rinse and repeat.

So how does one maximize their chances with a Trip-Zero?

To pull off a successful trip-zero trade, here are some tips and rules to consider following:

  1. Don’t go and buy a dormant .0001 stock with no bid unless you plan on holding it for a long time as a lotto ticket type play. You want to find a stock that has interest, or that you know will be getting interest shortly. This could be due to news, a promotion, a stock alert, or plain old hype generated by big players on a message board.

  2. Don’t chase a trip-zero very far. Every tick you chase represents a big gain for the guy who is selling you shares, and much less of a potential gain for you, if the stock continues to run at all. If a stock has been based at a .0003 ask for a long time and all the sudden gets hot, try to get shares at .0003. Depending on how big the hype is and how easily the stock moves, maybe go for .0004’s. Any higher than that and you’re setting yourself up for a guaranteed loss if the hype subsides.

  3. Try to buy at the last minute. Trip-zeros almost always follow the same routine. Nobody wants to buy the ask until it starts to fall. You never know how many shares are left on the ask, but when it goes from 8 market makers down to 3, you can probably assume there are a lot less. You want to be buying those last shares as there is a much greater chance of the stock up-ticking soon after you buy. This is not a secret technique, and you will see that others are waiting to pounce as well. Watch some trip-zero’s trade and you will see that as the ask begins to fall, buying volume will pour in like there’s no tomorrow. If you miss it and don’t get shares, don’t worry about it. Either wait on the bid or simply move on to find the next play.

  4. Once your buy order fills, set your sell order immediately. If the stock is moving slow, get in line one tick higher. If it’s going fast maybe 2 or 3 ticks. You can always modify your order, but you want to get your order in “the line” as soon as possible. If the stock doesn’t seem to be gaining momentum, hopefully there will be enough buying to clear out your shares, even if the asking price doesn’t totally clear out. Getting ahead in the line can make a big difference. Again, if the stock starts getting big buys, you'll likely be able to modify your order to a higher price before your shares sell.

  5. Be ready to pull the trigger to get out even. If you were one of the lucky guys to get shares at the ask right before it up-ticked, you are now in pretty good shape. If you have to you can sell your shares at the bid and get out even (minus commission of course). Trip-zeros will very often sit idle for a while after an uptick because nobody wants to jump up and hit the new asking price right away. It’s a big percentage increase, and nobody wants to be the only one to pay it. You will likely see “paint jobs”, a few small orders hit the ask. These are used to paint the ticker and chart, and get people motivated to follow along and hit the ask. Most buyers will wait to see some bigger orders come in, or for market makers to fall off the ask, before they’ll buy as well. If the stock sits for some time with little buying and the bid starts getting pounded, you might consider getting out even. You might be selling early, and the stock may very well bounce back and continue, but just know you may be passing up your only chance of getting out without a loss… This is always a tough call and should be made on a case by case basis. Just remember, nobody ever lost money (at least much of it) by selling even.

  6. If you do find yourself in the fortunate position of holding cheap shares of a trip-zero mega runner, (Say you bought at .0002 and the stock is at .0005) you should strongly consider taking profits if you haven’t already. A lot of traders like to sell half their shares at a 100% gain. This locks in profits equal to the original buying capital. The rest of your shares (referred to as “free shares”) represent pure profit no matter what price you sell them at. This technique is definitely safe, and sometimes you will have the stock continue to run, increasing your profits. Other times you will be better off selling all of your shares, but it is up to you to determine what the longevity of the play might be. Just like the last tip, nobody ever went broke taking profits!

  7. If you are fortunate to have a win with a trip-zero, and you’ve sold your shares, don’t look back. You’ve made your money and it’s time to move on to the next play. Traders will often try to trade the same stock again. They think “It was good to me once, maybe one more try..” This is an addictive, and dangerous thought process. You may make out twice or three times occasionally, by playing the same stock again, but more often than not you will be playing the stock on its downtrend, and you’ll lose money. Take your money off the table and go find another one!

How do I find Trip-Zero's to trade?

Basically you need to either search around on message boards to find people talking about trip-zero's, or go out and find them yourself.

Finding trip-zero's on message boards

On iHub, one of the most active boards for trip-zero picks is the .0001 PICKS ONLY board. Just remember not to believe much of what people say, and know they are likely pumping stocks they already own.

Scanning/Filtering for them yourself

If you want to find trip-zero's on your own you need a stock scanner or filter. We have various services for this listed on our Tools page. By far, our favorite filter/scanner tool is EquityFeed. It gives you real-time, streaming filter capability which can help you narrow down and find the trip-zero's that are getting hot. Check out our full EquityFeed Review for more information.

Please make any suggestions for additions/changes here.


Last Updated: 11/17/11

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