The Dangers of Penny Stocks

Successful
companies are not made in a day and companies with great futures do not simply
pop onto the marketplace. Most start out as penny stocks and they work their way
up through the ranks. However, many ignorant investors think that getting rich
quick by investing in penny stocks and all it takes is finding just those
stocks. What we want to point out in this article is that penny stocks are not
always the best path to financial success.

First
Let’s Look at What Exactly A penny/Microcap stock Is

We shall refer to
these types of stocks as microcaps and “penny stocks” for the sake of making
things simple. While penny stocks are classified as such not everyone agrees on
which stock is a microcap or not. In general if a stock market capitalization is
between $50 million and $300 million it is considered a microcap but this too is
a blurry issue. The SEC (Securities and Exchange Commission) classifies all
stocks under $5.00 as penny stocks as do we while others consider penny stocks
to be only those trading under $1.00. But to be sure, all stocks trading on the
Pink Sheets are considered penny stocks by us.

The important thing you
need to know is that penny stocks are far more dangerous than other stocks.
Penny Stocks are very much like junk bonds in many cases.

So What Is
the Problem With Penny Stocks?

What makes penny stocks risky? Let’s look at the most important concerns you
need to consider before investing in penny stocks:


Information Available to the Public Is Poor

Part of a good strategy when investing in stocks, microcap or otherwise is
to obtain as much tangible information otherwise you will not be able to
make an informed decision. When it comes to penny stocks such information is
very hard to come by mostly because it is hidden, it is outdated and much
of the time misleading. For example, Pink Sheets (stocks with a .PK after
the stock symbol) are the most dangerous kinds of stocks because they are
not regulated. They do not have to report to the SEC or anyone else and they
can say whatever they want in public and press releases and there is no way
to verify what little information they do provide. In addition there are
1000s of con artists who disseminate false information about PK stocks in
order to manipulate the stock price for their own benefits. To make matters
worse, much of the information made public about PK stocks is published by
by sources less than credible but those sources often make themselves appear
credible.

Lack of
Minimum Standards

Normal stocks have to must comply with SEC and stock exchanges regulation
and make regular reporting and provide sources for the information. They
have to prove everything they say and open the doors to their accounting
books. The OTCBB does require (.OB) some timely reporting but even those are
not always as good or reliable but the Pink Sheets are not regulated by
anyone. It is almost like the Black Market of penny stocks.


No Company History

One of the dangers of microcap stocks is that many of them are very new and
when they run out of fools to fund them they shut down and start over under
a new company name. Finding the history of a microcap is often an exercise
in futility and while many do have a track record often times it is not a
good one which makes picking good penny stock picks very hard. A great deal
of leg-work.


Poor
Liquidity

Often times investors buy a penny stock or pink sheet stock which is hard to
sell. If the liquidity level (trading volume) is low you will have a hard
time selling the stock which will require you to lower your ask price. Many
times the company executives or affiliates put out false or questionable
press releases in order to either manipulate the price to go lower or
higher, depending on their interests. If the trading volume is low it makes
it very easy for other traders and market makers to manipulate the stock as
they see fit and believe this, it will not be in your interest when they do
this. Most OTCBB and PK stocks are the target of penny stock picks websites
who practice pump-n-dump especially if the float is small. Never buy a stock
with a small float, even normal stocks with small floats are dangerous
because they can be manipulated with ease.

A Problem
for New Investors

Microcaps are major problem for the SEC because there is nothing it can do about
it and there is a great deal of fraud involved in penny stocks. There are
literally 1000s of penny stock picks websites out there pumping junk penny
stocks.


Biased Recommendations
– Many penny stock companies and even
individual investors and investing firms hire public relations firms,
individual investors and stock picks websites and pay them well to promote
their stock through television ads, internet websites, radio shows, email
etc. etc. in order to persuade you to buy their stock.

Here is an example:

These companies have compensated me to have their
profiles and press release distributed to this board. ”
http://www.hotstockmarket.com
<-STAY AWAY FROM THAT BOARD!

As soon as
enough fools have stated investing and the stock makes a slight move upwards
other fools think something big is about to happen and they buy as well
while the price moves up while at the same time those company executives,
affiliates or scam-investors sell their stock at a profit. This usually
takes place quickly and once the con artists start dumping the stock starts
to tumble and the poor fools are left with a bunch of worthless stock. If
you receive emails advertising a stock or see stocks being pumped/advertised
on public discussion forums stay away from them unless they are promoted by
someone with a good reputation and track record. If a new press release
comes out don’t just read it and eat it up. research it and investigate it
well.


Off-shore
Scams– Under regulation
S, the SEC allows companies to sell stock outside the U.S. to foreign
investors without registering the stock. These companies will
then sell the stock at a discount to offshore brokers who, in turn, sell them back to U.S. investors
the very next day for a substantial
profit. If you see a stock start to trade on high volume and the price
starts to drop fast this is usually what happened. They bought the stock at
up to 70% discount from the company who owns the stock and dumped it the
next day or soon after they have started their pump campaign.

Many investors allow greed and wishful thinking to cloud their judgment and
invest in all sorts of junk penny stocks. In our opinion 95% of all penny stocks
are junk. Don’t buy any stock pick you see mentioned anywhere or everywhere
without doing your own due diligence. There are countless stock picks websites
run by pampers who have mastered the art of deception. Stay away from them.

This is the only penny stocks website you will ever need for penny stock
picks.

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