The term “penny stock” is somewhat of a misnomer. In the world of Wall Street most, but not all stocks that sell for less than $5 are typically looked at as penny stocks. In the most general terms, penny stocks are low-priced stocks having a market capitalization between $300 million and $2 billion.
Penny stocks are the Rodney Dangerfield of the investment world; they get no respect. Even though there are some mid- to high-cap stocks that trade on the big exchanges, such as the NASDAQ and NYSE, most investors won’t even consider penny stocks. Most individual investors look at penny stocks like the Wild West, as an untamed frontier apart from all the glamour of Wall-Street media coverage. However, because penny stocks are so volatile the gains and losses are often impressive, but hardly ever spoken about outside of the penny-stock community. Still, just because penny stocks aren’t covered by the press doesn’t mean the stocks aren’t worthy of consideration. In addition to the volatility, penny stocks are ripe for targeting by scammers.
The “Pump-and-Dump” scam is probably the most well-known and productive penny-stock con. Essentially, a promoter will generate interest in an unknown stock to get unknowing investors to buy up shares, “pumping” up the price of the stock. Once the stock shares have increased in value, due to the sudden interest, the scammer will then sell, or “dump,” all their own shares, earning a huge profit at the investors’ expense.
The opposite of the Pump-and-Dump scam is the “Short-and-Distort.” Scammers will short a penny stock and then intentionally fabricate highly-damaging rumors about the company. Investors hear the rumors and sell their shares, the price of the penny stock plummets and the scammer reaps the rewards.
A special mindset is required in order to achieve success trading penny stocks and successful traders possess the following attributes:
• Realistic expectations: While some investors do make a fortune overnight trading penny stocks, it is nowhere near the norm. Those with impractical expectations will almost always lose money, and quite quickly.
• A penchant for due diligence: Virtually all successful investors of penny stocks invest their time doing research in a stock before they invest their money.
• Patience: As with any investment, the biggest gains in penny stocks are realized over the long run. As the companies that issue penny stocks begin to generate more revenue they become more visible, creating interest from main-stream investors, causing their stock to rise in value. Continue Reading