Penny Stocks
A Brief Definition of Penny Stocks
Penny stocks are stocks that trade for under $5 a share or less. But more often they trade for actual pennies, hence the name: penny stocks.
They are traded over the counter through quotation services. The OTC Bulletin Board or Pink Sheets are quotation services. A quotation service is simply an electronic system that displays real-time stock quotes, last sale prices, volume, etc.
The fact that penny stocks trade for such a low price is great because your initial investment can be very low. However, penny stocks are thinly traded stocks. This means that there are usually not many buyers and sellers present. This lack of liquidity can be a problem.
Another problem with penny stocks is that information about a penny stock company can be hard to find. This can really hinder your trading decisions. Without being able to evaluate a penny stock for its potential you are trading in the dark. The reason information is hard to find is because these stocks are listed on the Over the Counter Bulletin Boards (OTCBB) and Pink Sheets and they are not required to file with the Securities and Exchange Commission (SEC). That means they are not regulated or publicly scrutinized like stocks that are listed on the New York Stock Exchange and Nasdaq. These stocks have not met the minimum standards to be listed on NYSE or NASDAQ. Because they are not regulated they can be easily manipulated and information about their financials, et al, can be scarce or downright false.
In addition, penny stocks can be manipulated very easily by unscrupulous “pump and dump” operators. Pump and dump operators can be insiders in the penny stock company or just other investors who want to artificially increase the value of the shares in the company to make a quick buck.
This is atypical of how pump and dump operators works: Through e-mails, chat rooms, forums, or you might even hear about a great stock on the radio or T.V., these promoters, or “pumpers” start talking about the company and making false claims about its financial health or its next hot product that will make the price of the shares skyrocket. These people “pump” the stock and create a buying frenzy. Unwitting investors start buying the penny stock thinking they are going to make a bundle.
What really happens is the people who promoted (pumped up the value of the stock) are just waiting for the stock to reach its peak and then they sell (dumping the stock). They bought it very low, pumped up its perceived value and then sold it – they dumped it. They stop promoting the stock and the prices plummet and you lose your money.
The pumpers on the other hand have made a small fortune because they bought low and sold high.
If you want to trade penny stocks but would like to avoid the “pump and dump” operators it is best to become a member of a reputable microcap/penny stock newsletter service. These newsletter services can give you some insurance against the pump and dump operators. Because you are paying them to find you high quality penny stocks you can hold them accountable. If they don’t deliver then they don’t make money.
Another reason to join a good penny stocks newsletter membership service is that the reputable ones will offer you a money back guarantee. If they are doing poorly you can cancel and get your money back in the bargain. Before you join you can also check to make sure their newsletter service will not be paid by any company to promote stocks and that they will be completely objective, with no conflict of interest.
