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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 the penny stock resource center
Article Source: http://www.simplysearch4it.com/article/6772.html
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