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Finding False Gold In Penny Stock
By: Michael Sanford
As far as traders go, many do not see the penny stock as a solid way to do
business. Many believe that dealing with penny stock is a risky business. And it
really is. Some traders think that the next Microsoft and Walmart stock is
buried in a penny stock, which is why they stick around trading unknown stocks
over the market.
What is a penny stock? According to the Securities and Exchange Commission
(SEC), any stock under $5 is a penny stock. Definitions can vary; some set the
cut-off point at $3, while others consider only those stocks trading at less
than $1 to be a penny stock.
What makes a penny stock risky? Certain issues must be considered before you
decide to buy a penny stock:
1. Lack of Information Available to the Public - the key to any successful
investment strategy is acquiring information to make informed decisions. In
dealing with penny stock, information is much more difficult to find. Much of
the information available about a penny stock is typically not from a credible
source.
2. No Minimum Standards - Stocks on the OTCBB and Pink Sheets like the penny
stock do not have to fulfill minimum standard requirements to remain on the
exchange. Sometimes, this is why the stock is on one of these exchanges. Once a
company can no longer maintain its position on one of the major exchanges, the
company moves one of these smaller exchanges. While the OTCBB does require
companies to file timely documents with the SEC, the Pink Sheets has no such
requirement. Minimum standards act as a safety cushion for some investors and as
a benchmark for some companies.
3. Lack of History - Many of the companies considered to be a penny stock are
either newly formed or approaching bankruptcy. These companies will generally
have a poor track record or none at all. As you can imagine, the lack of
histories of companies only magnifies the difficulty in picking the right stock.
4. Liquidity - When a penny stock doesn't have much liquidity, two problems
arise: first, there is the possibility that the stock you purchased cannot be
sold. If there is a low level of liquidity, it may be hard to find a buyer for a
particular penny stock, and you may be required to lower your price until it is
considered attractive by another buyer. Second, low liquidity levels provide
opportunities for some traders to manipulate stock prices, which is done in many
different ways - the easiest is to buy large amounts of stock, hype it up and
then sell it after other investors find it attractive
Penny stocks have been a thorn in the side of the SEC for some time because of
the lack of available information and poor liquidity make these groups of stocks
an easy target for fraudsters. There are many different ways these people will
try to part you from your money, but here are two of the most common:
1. Biased Recommendations - Some companies pay individuals to recommend the
company stock in different media, i.e. newsletters, financial television and
radio shows. You may receive spam e-mail trying to persuade you to purchase a
particular penny stock. Look to see if the issuers of the recommendations are
being paid for their services as this is a giveaway of a bad investment and make
sure that any press releases aren't given falsely by people looking to influence
the price of a penny stock.
2. Off-Shore Brokers- The SEC permits companies selling stock outside the U.S.
to foreign investors to be exempt from registering stock. These companies will
typically sell the penny stock at a discount to offshore brokers who, in turn,
sell them back to U.S. investors for a substantial profit. By cold calling a
list of potential investors (investors with enough money to buy a particular
stock) and providing attractive information, these dishonest brokers will use
high-pressure sales tactics to persuade investors to purchase penny stock.
Be wary when investing on a penny stock. Chances are you will lose more money by
putting your trust in a penny stock.
About the Author:
For more information on penny stocks check out http://www.everything-trading.com
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