Wolfie's penny stocks

d712

I know that Hollywood movies are not always 100% factual but there must be some element of truth in the sale of penny stocks charging a greater commission than blue chip stocks as this was the basis upon which Jordan Belfort founded Stratton Oakmont in The Wolf of Wall Street.

If there really was a 50% sales commission, then I’m wondering how that would work. If 50% of what the buyer pays goes to the stockbroker, then the broker selling stock at $1000 would get $500 commission.

But that would mean that the buyer has only purchased stock valued at half what was paid for it and therefore the share price would have to double before the stock could be sold and the buyer break even.

And if the commission was less than 50% but still very high there would still be a similar issue.

Or have I got that completely wrong?

AnotherJoe

d712 wrote: »

I know that Hollywood movies are not always 100% factual but there must be some element of truth in the sale of penny stocks charging a greater commission than blue chip stocks as this was the basis upon which Jordan Belfort founded Stratton Oakmont in The Wolf of Wall Street.

If there really was a 50% sales commission, then I’m wondering how that would work. If 50% of what the buyer pays goes to the stockbroker, then the broker selling stock at $1000 would get $500 commission.

But that would mean that the buyer has only purchased stock valued at half what was paid for it and therefore the share price would have to double before the stock could be sold and the buyer break even.

And if the commission was less than 50% but still very high there would still be a similar issue.

Or have I got that completely wrong?

... "but its only got to rise a penny"

d712

AnotherJoe wrote: »

... "but its only got to rise a penny"

They don't all sell for one penny and it's still 100%.

AnotherJoe

d712 wrote: »

They don't all sell for one penny (the same principle applies. Maybe its two pennies maybe its twenty, but its not the (say) $200 an Apple share would need to rise) and it's still 100%.

And since you can work that out, you aren't the sucker they are looking for.

bowlhead99

d712 wrote: »

And if the commission was less than 50% but still very high there would still be a similar issue.

Or have I got that completely wrong?

There will be a spread between buy and sell prices, which can be large when you are looking at small and illiquid companies, and certainly would have been pretty large 'back in the day' on penny stocks without the internet and more perfect market information.

A company might have a mid price of 2p, but the price at which a share owner or market maker would offer a 'normal market size' order to buyers might be 2.5p, while the price at which buyers (investors or market makers) would bid to take that amount of stock off your hands might only 1.5p. With a huge bid-offer spread, there is scope in the middle for a lot of money to be made by market makers and brokers as there is a whole penny of value in putting together a trade between buyers and sellers and making a deal happen.

Although the headline quoted bid-offer price for orders of 'normal market size' (calculated by reference to historic volumes) might be 1.5-2.5p, the actual matching is essentially an auction process in who is willing to offer how much for how many shares and who is willing to let how many shares go for what price. So, many transactions could occur within the published spreads, while many others could be outside them if the volume of shares to be moved is substantial.

Imagine you are some dumb idiot on a suckers list who is willing to buy crappy shares on the recommendation of some broker over the telephone due to a combination of greed and fear of missing out. ABCD Company Inc has a mid price of 2 cents but offer price of 2.5 cents. But the broker says it is a screaming bargain and sitting gazing out of your window at your truck outside, you imagine how great it would be if one day you could sell it for ten dollars like a share of Ford Motor Company. You know it would take ABCD a lot of luck and fifty years to reach the size of Ford, and you don't plan on holding fifty years, but even a dollar would be nice after a decade, or even ten or twenty cents next year.

The broker warns that the shares are illiquid and hard to get, and if you wanna put a meaningful amount in like $5000, the shares might cost 2.5 cents or more, and there is commission on top for getting access to this opportunity. OK, you authorise to pay up to 3 cents total. Then the broker goes on to the OTC pink sheets market and agrees with another broker that they will do the deal at 2 cents (because that other broker has been telling his client that they should exit the position and warning that the bid price is only 1.5 cents but he will try his best to do better).

So the lucky 'customer' of the Wolf has paid 3c including commissions for a share with an official mid price of 2c while the customer of the second broker is very happy to receive 1.5c net of commissions because he'd assumed he might have to get only 1.5c bid price and then pay commissions to his broker leaving him with even less.

So of the $5000 paid by the buyer for the shares, only $2500 makes it to the seller, and the other 50% was lost along the way as commissions for the brokers that made the deal happen.

Snow_Dog

@bowlhead99 - awesome explanation, thank you.

bowlhead99

Snow_Dog wrote: »

@bowlhead99 - awesome explanation, thank you.

No problem, it took me a while as I had to take occasional breaks to snort cocaine from a prostitute's navel. This investment game is hard work.