The entire appeal of penny stocks, such as those traded on the TSX Venture Exchange, which many Kirkland Lake, Ontario-area companies have issued, is the idea that one might be able to buy thousands of shares for less than $1 and then earn thousands in percentage returns, should the company ever reach just $10. To the novice investor, hoping for a $0.10 stock to double to $0.20, might not seem that unreasonable an idea.

Almost every successful company that has seen its shares increase substantially went public above $15 per share. Facebook, Inc. (Nasdaq: FB), Wal-Mart Stores, Inc. (NYSE: WMT), Microsoft Corporation (Nasdaq: MSFT), and McDonald's Corporation (NYSE: MCD) all first issued stock priced above $15 per share.

Even in 1919, when The Coca-Cola Company (NYSE: KO) first offered shares, they were priced at $40 each. Since the early days of stock trading, an extremely small fraction of companies that have offered shares below $10 or $15 have ever seen them make substantial gains.

Wide bid-ask spreads add to risk with low-priced stocks

Every stock has a bid-ask spread. The bid is the best price that anyone in the market is willing to buy at; the ask is the best price anyone is willing to sell at. Once the bid and the ask meet, or cross, trades take place. Many penny stocks trade in the over-the-counter market in the United States, where the smallest increment in price is $0.0001. At the lowest possible level, a bid of $0.0001 would be 50 percent less than the closest possible ask: $0.0002.

Affinity Gold Corporation (OTC: AFYG) is a company with shares like this: last traded at $0.0145, down close to 100 percent over their history.

In Canada, on the TSX Venture Exchange, the lowest price a stock can trade at is $0.005. The next highest price level is $0.01, a 50 percent spread. This means that an investor who purchased $1,000 of stock at $0.01 per share and decided that they wanted to sell immediately would only get $500 back, or $0.005 per share.

When stock prices become so low, companies often perform consolidations, also called reverse splits. With consolidations, owners with 10 shares before a one-for-10 consolidation will be left with one after, trading for about ten times more. Doing this, companies with penny stocks can remedy the high spreads at lower prices, bring liquidity back, while slashing the number of shares owned.

Mysterious missing consolidations

Stock chart providers adjust prices before splits and consolidations so that changes in share price reflect the value of an investment bought previous. Illustrating this, included in the photo gallery are charts of stock in Kirkland Lake-area operator BonTerra Resouces Inc (TSXV: BTR), which underwent a one-for-20 consolidation, in 2014, and Baidu, Inc. (Nasdaq: BIDU), which underwent a 10-for-one split, in 2010, from both and Charts show smooth pre- and post-split activity for each.

Also provided are charts from both providers for an unnamed stock, traded on the TSX Venture, which appears to be missing at least one consolidation, causing readers to be left with the impression that shares were at $0.03 in 2012, when, on a split-adjusted basis, shares were over $20.

It has been previously noted that accepts payments to publish releases; whether or not it accepts payments to manipulate charts by leaving out consolidations remains unclear.

With 20 years of experience studying stocks, this reporter has never before seen a chart missing a split or consolidation. Besides misleading investors to think that the unnamed shares were at $0.03 in 2012, instead of a split-adjusted $20-plus, missing consolidation adjustments causes performance calculations to report gains, when they should be reporting significant losses, misleading investors further. For Mr. Smith, the hypothetical Kirkland Lake penny stock distributor in part two of the series, such charts missing consolidations would seem another valuable distribution tool.

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