Penny Stock Investing – Buyers Beware

Penny Stocks – Buyers Beware

Ok, I thought I would write this post about the dangers of penny stock investing because I just get spammed a lot  in blog comments and on twitter from people recommending a penny stock service like Penny Stock Prophet

First off, if you have never traded before and never looked at a stock chart then avoid penny stocks like the plague. You will get ruined.

Understand that penny stocks are under a $1 a share because they are usually low quality or maybe former higher priced stocks that got delisted from the bigger(NYSE/AMEX/NASDAQ) exchanges because they could no longer meet the listing criteria, have huge debt/bad balance sheet(meaning equity(stock) owners could get wiped out) or something is wrong.

Penny stocks(aka Bulletin Board stocks) are not well regulated and can be easily manipulated because it doesn’t take much capital to move the stocks.

Realize that large institutional investors like mutual funds/hedge funds/pension funds are not buying penny stocks. The people buying penny stocks are day traders and novice investors who read stock chat rooms.

Most penny stock picking services like newsletters I would avoid because essentially you have a group of novice investors all looking at the same picks and since penny stocks are usually illiquid(don’t trade much) all the sudden you have a handful of investors trying to buy the same stock at the market open and bamm, the stock goes up but most investors didn’t get filled at the lower opening price but at higher prices and many times the stock rolls right back over.

The question I would ask though is why is this “super successful/rich newsletter writer” is telling you about his “secrets” to buying penny stocks. I would seriously question the service if the newsletter writer is not properly disclosing if they actually own the positions they recommend(they should disclose that).

I bet you I could make a lot a money creating a flashy website marketing a penny stock service touting hot penny stock picks and recommending picks I like each day, but making sure I owned the picks the day before I recommended them so I could sell them as they get bid up by my subscribers.

So if you find a penny stock service and decide to google the service for “reviews” or “scam” etc…..more times than not you will find affiliate marketing websites that get paid to recommend that service so they aren’t actually real reviews.

So back to the Penny Stock Prophet service I mentioned above. I looked at the sales page and it is a very good SALES page. It has all the key selling points……and even has the very effective online marketing tactic of “Act Now as its a limited offer” and has a big bold line saying “Current Positions Available: 10”, although when you click refresh on your browser the Position available # goes up most times, so I guess they increased their limited positions available  ? 🙂

How You can Trade Penny Stocks

In summary, if you want to play penny stocks you have to look at a stock chart and make sure that the chart pattern is showing proper volume accumulation and moving up past resistance.

You can go to a free stock screening service like www.finviz.com and just set the parameters for under $1 per share and relative volume above 1 with average volume say above 100,000shares (less than that and you will have hard time selling it and the buy/sell spreads will probably be high).

Then just click on the tab that sorts the stocks by %change and look at all the top %movers charts. If you find a stock that is showing quiet volume for a while with a tighter trading pattern and all the sudden it clearing resistance and breaking above recent highs on volume then it is probably worth considering. DON’T BUT A PENNY STOCK BASED ON A STORY YOU READ OR HOT PRODUCT.

ps – I love comments, so feel free to leave them on this post if you have any experiences with penny stock services you have tried,etc…….it will help other readers that come here.

2 Comments

  1. Ted Goggans February 9, 2010
  2. Top Trader October 24, 2010

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