Penny Stocks 101 – 5 Things You Need To Know Before You Begin Trading

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Pump and dump scams are getting more sophisticated and harder to recognize

You are probably familiar with the basic concept of a pump and dump scam. One or more scammers buy a bunch of worthless penny stock. Then they “pump” it (another way of saying hype) and trick people into thinking it’s a stock they should rush in and buy based on the rumor that they spill. As more people join, the price goes up of course, based on simple supply and demand. The price is now artificially inflated because the true value of the stock has not changed. Then, once the price has risen significantly, they “rid” it (sell it) and reap their ill-gotten profit. Very soon after the sale, the stock price usually crashes and most investors don’t exit in time because no one wants to buy their shares.

Pump and dump basics are an old rip off. However, there are many variations and the scammers are becoming increasingly sophisticated in the way they pump worthless stock. Our federal SEC (Security Exchange Commission) is always trying to keep up, but it’s hard to do. One of the latest variations is for a room full of “telemarketers” to call and pretend to be calling the wrong number and leave messages where they pretend to leave their friend a good tip. They will generate thousands upon thousands of these posts which can really increase the interest (and price) of a particular title.

Many scammers have also learned not to use more subtle tactics. Instead of using “to the face” language and blatantly touting a penny stock, they just drop a few clues in passing and then let the rumor mill snowball from there. This has proven to be a very effective way to spread a false rumor about a stock, it can be quite difficult for people to realize what is really going on before it is too late. These types of rumors are sometimes even picked up by the press.

It Matters Where a Penny Stock is Trading

The SEC defines a penny stock as any stock that trades below $5/share. Other people have set the threshold lower by saying that a penny stock is any security that trades for less than $1/share. Anyway, penny stocks can be traded on any chart. Even the highly reputable New York Stock Exchange (NYSE) may host a penny stock once in a while, although if the company stays in that territory for a long time, it will likely be kicked out of the NYSE. It is common for the NASDEQ to host several penny stocks, just like the AMEX. However, when most people think of penny stocks, they tend to think of stocks that trade on message boards (OTCBB) or pink sheets where things aren’t as tightly regulated.

Most investors new to trading penny stocks know that stocks trading on the NYSE, NASDEQ, and AMEX have more requirements to list on these boards, and therefore more fundamentals are known. of these companies. However, what many new investors don’t realize is that there is a HUGE difference between a penny stock traded on the OTCBB and the pink sheets. The OTCBB is actually owned by NASDEQ and it has a lot more requirements for a stock to be listed there than the pink sheets which have virtually no requirements.

Now fraud can happen with a stock listed on any chart and the risk of this happening with a stock listed on the OTCBB is higher than with stocks listed on the NYSE, NASDEQ and AMEX . However, I want to point out that the potential for fraud is MUCH GREATER for a security listed on the pink sheets than on the OTCBB – there is a very substantial difference. You should always take this into consideration before making a transaction. You should be especially wary of any stock trades on the pink sheets. So keep your antennae up!

Trading Volume Really Matters and I’ll Tell You Why

If you’re a trader used to trading stocks hosted on the NYSE, NASDEQ, and AMEX, you might get a rude awakening when you start trading penny stocks on the OTCBB and the Pink Sheets. The volume of these stocks is naturally lower than that of stocks traded on the large charts. However, volume can sometimes get so low that it prevents you from selling a stock when you need to, i.e. you can easily get stuck with a stock that is heading south in a hurry. and you can’t unload it. So, beware of stocks that are trading at very low volume.

When “free” isn’t really free

If you Google “penny stocks” you will invariably come across the word “free” over and over again. You’ll see plenty of offers to sign up for “free stock picks” and plenty of invitations to trade your email for a “free newsletter” that promises to give you “insider tips.” What I learned is that “free” is never really free with these offers.

First of all, if you actually follow any of these tips, you will most likely end up losing your entire investment – if not on the first trade, then on the first few. Consider yourself lucky if you break even or lose no more than 20%.

Second, it’s important to consider the cost of reading anything that’s not going to pan out. It costs you time and sometimes it costs you in terms of stress and high cortisol levels as you watch your investments disappear.

An easy way to make profitable trades

I started making a lot of money with penny stocks (and more than ever in the stock market before I traded penny stocks) when I learned that the best way to find the really good bargains was to buy premium picks from real experts. Keep in mind that only some of these services have choices that will make you big bucks – and they’re not always from the people you first think are the best. I’ve learned that it takes skills similar to those found in a really good investigative journalist to get the kind of information you need to pick the best penny stocks and that’s not something you you learn at school! Some people just have this uncanny ability to sniff out the right information. To know which of these choices is the best, you should always test the services you try in a test account before using real money.



Source by Joe Wolfe

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