Private Companies

The shells, or penny stocks, that private companies use to go public do not have any ongoing operations. They are referred to as shells because their only reason for existing is to be used for a merger. Therefore, the price of stock that is nothing but a shell is very low. The price of a penny stock that is used for a reverse merger is often below .10. The stock starts appreciating in price once the public company announces that it has acquired a private company. Investors now will value the shell according to the operations of the business that it has merged with. If the private company has a strong product that is in demand investors will start buying shares of the company sending the price up. The shareholders who sold the shell now own 5% of a stock that has value and the buyers of the shell now can raise money using their appreciating stock. The investors who buy in early can benefit from the price appreciation that will result as investors realize that the penny stock is no longer a shell but is now an operating business. If the private company has earnings, the stock will appreciate much faster due to the intrinsic value of the stock and the scarcity of profitable penny stocks.