Author’s warning: This is a controversial topic
I am a fairly opinionated person and thus far on this EzineArticles site I have intentionally strayed away from controversial topics and written some fairly vanilla “how to” articles on investing topics. But I just read an article that made my blood boil: the article concerned Penny Stocks.
As a 25 year veteran of trading on both Wall Street and the CME there are very few areas of investing that are infested with more vice, scammers and downright cheating than the penny market.
I know, that is a very bold statement to make… but I will back up my statement with hard facts and experience, and not all Penny Stocks are scams… but the vast majority of these Stocks are simply fronts for companies that may/or may not exist.
Here is how the life of a these stock transpires. As you may have noticed, most of these stocks are promoted through newsletters and advertising. There is a very good reason for this, as the stock companies usually promise the newsletter advertisers a block of stock in exchange for getting the stock price to rise. The newsletter usually touts the “potential” for the stock to rise based upon certain factors occurring and usually elaborates on the unbelievable potential the stock has should these “certain” factors occur.
I usually recommend that potential investors in penny stocks contact the stock itself and ask about capitalization and revenues. Without exception, these stocks usually are severely undercapitalized and have no revenue to speak of. More often than not, an investor questioning the company will be sent to an answering machine or the newsletter promoting the penny stock. The SEC has estimated that the majority of these stocks fall into the “pump and dump” category. And with good reason.
A normal stock, traded on an exchange, usually has a firm designated as a market maker in that stock, along with a floor specialist who facilitates the trading of that stock. This system allows transparency in the trading of any stock and allows an investor to see the exact and verifiable volume and price movement of the security.
This transparent system is absent in the Penny Stock market, and the stock issues are usually without a true market maker. All to often, the market maker in a penny stock scheme is the very company itself. The fox is in the hen house, so to speak. What this means is that the Stock company is setting both the bid and ask prices on its own stock. Further, most Penny stocks are traded on the ‘Pink Sheets” which puts it into the category of trading in the wild west.
Many experts have estimated that 9 out 10 Penny Stocks fail within the first year of their offering. I have heard numbers as low as 7 out of 10 bandied about, but the point is simple. When you are trading Penny Stocks you are playing in a non-transparent, non-exchanged oriented market, and this is the recipe for disaster. It is usually just a matter of time.
For the record, I am not saying that all penny stocks are bad or dangerous, just the majority of them, and odds do not favor long term success. Heed my warning and prosper, there are simply too many exchange traded stocks that will earn you ample money than risking sums of your hard earned money in the Penny Stock Market.