The trading in biotechnology company Cocrystal Pharma, Inc. COCP is a good example of how inexperienced traders can lose a lot of money.
What Happened: Cocrystal closed Tuesday at $2.14, a gain of over 70%. At one point during the day, shares reached $3.46, which was about 270% higher than the previous close.
This move was driven by news that the company was going to offer 26 million new shares to the public priced at $1.54 a share.
It appears as though all the investors who bought COCP and didn’t sell are going to lose money. Wednesday morning, shares are trading around $1.50.
Why It's Important: Traders who think a company offering new shares is a good thing are usually wrong, as offering shares is a typically bearish sign for a company.
When a company issues new shares, they typically do so because the insiders and their bankers think shares are overvalued. They sell because they're taking advantage of what they perceive to be a premium in the share price.
If the company thinks shares are a good sell at $1.54, why would an investor who doesn’t know much about the company think that they're worth more? Rookie traders could save money if they learn this valuable lesson.
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