Finding False Gold in Penny Stock

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.

For more information on penny stocks check out the penny stock resource center

---

Numismatics are for Collectors, Not Investors

As a precious metals investor, you may heard much about... Read More

Moving Average Convergence Divergence ( MACD ) Charts

The Moving Average Convergence Divergence charts, or MACD charts for... Read More

Porters Five Forces Analysis

If you've ever listened to Warren Buffett talk about investing,... Read More

Retirement Plan Considerations Cheat Sheet for Small Business

RETIREMENT PLAN CONSIDERATIONS are something every small business person needs... Read More

June 2005: Weather Forecasts for Weather Traders

If Johannes Kepler, the renowned 17th century astronomer and discoverer... Read More

Finding a Broker

"Hey Joe! I need help finding a broker. I notice... Read More

Retirement ? Its Sooner Than You Think!! (Honestly)

Many people hear "retirement" and think- what? 401K? Roth vs.... Read More

Investing In or Owning Drug Lab Properties

Clean Up (includes the insides and the outside of a... Read More

Trading Is Not Rocket Science!

Despite what some people may lead you to believe; day... Read More

Asset Allocation Lessons: The 70% Inflation Solution

For investors only... and for speculators who need to invest... Read More

Retirement Is A Scary Proposition If Youre Without A Plan, And Running Out Of Time

Of the 75 million baby boomers nearing retirement today, many... Read More

Press Release Scams and Successes: Reading Between the Lines

Press releases are a means through which companies can keep... Read More

Caveat Emptor: You May Owe Taxes Despite 401(K) Losses!

One among many ways you lose money in non-indexed mutual... Read More

Invisible Mutual Fund Fees Erode Your Returns!

Many investors think that investing in mutual funds is free.... Read More

Which IRA Is Best For You?

An Ira is one of the greatest ways to save... Read More

Why Should I Use Penny Shares to Build Wealth?

A strategic question. Why indeed?1. A penny share would usually... Read More

Options Education: Financing the Calendar!

As a trader, one of the key things that I... Read More

In a Time of Need

As I take my leisurely walk with my dog through... Read More

For Entrepreneurs A SIMPLE Plan May Be Best

Q: I own a small decorating business and I'll be... Read More

Help with My Annuity

The cries are heard from the distance, "I need help... Read More

The Differences Betweeen the Wealthy and Everyone Else

I recently received an e-mail from a young lady who... Read More

The High Price of Oil

In less than four years, the price of oil has... Read More

Time is Money and We Are Running Out of Both!

One of the fundamental principles of finance is the concept... Read More

How to Setup a Profitable Trading Business

In my opinion trading is the most exciting and best... Read More

Have You Ever Seen A Map of the World Turned Upside Down?

For those accustomed to viewing things a certain way, it... Read More

A Safe Port For Mutual Funds But Not You!

Soft dollars, a form of legal kickback, is a sly... Read More

Stocks: Reduce Risk Yet Maximize Profits

It is important to note that every smart investor wants... Read More

A Secret Revealed: Why Most (Day) Traders Fail

The following perspective on (day) trading comes from my many... Read More

Types of Investment

The word 'investments' is one that most of us are... Read More

Coca-Cola - A Value Stock?

There has been much talk lately about Coca-Cola and its... Read More

Before You Invest You Must Read This

It is important to answer the following questions before you... Read More

The Power of Small Numbers: Trading Success is Based on Consistency, Not Home Runs

Online trading is so seductive - just sit, click, and... Read More

Boost Your Income With Financial Spread Betting

About 6 years ago I started to notice that certain... Read More