I am a fairly opinionated trader and thus far I have by design avoided from controversial topics and written some fairly plain “how to” articles on trading issues . But I just suffered through an article that made my blood boil : the article concerned Penny Stocks.
As a 25 year veteran of day investing on both the CME and CBOT and the Chicago Mercantile Exchange there are only few areas of investing that are plagued with more vice, scammers and right-down larceny than the penny stock pink sheets .
I realize , that is a very irratating statement to articulate ….but I will back up my statement with hard facts and experience, and not all Penny Stocks are corrupt …but the overwhelming majority of Penny Stocks are often fronts for companies that may/or may not exist .
Here is how the life of a Penny Stock developes . As you may have taken notice , most penny stocks are promoted through newsletters and advertising. There is a very good reason for this, as the penny stock companies usually promise the newsletter advertisers a a set percentage of stock in exchange for influencing the stock price to appreciate . The newsletter usually touts the “potential” for the stock to appreciate based upon certain factors occurring and usually elaborates on the unbelievable potential the stock has should these “certain” events occur.
I typically recommend that potential investors in penny stocks contact the c business itself and inquire about capitalization and revenues. Without exclusion, these stocksoften are pathetically undercapitalized and have no revenue stream to to discuss . frequently , an investor examing the company will be passed on to an answering machine or the newsletter promoting the penny stock. The SEC has calculated that the majority of penny stocks fall into the “pump and dump” category. And with good reason.
A normal stock, traded on an exchange, often has a investment bank picked as a market maker in that stock , along with a floor specialist who directs the the trading of that stock. This system makes for transparency in the exchange of any stock and allows an i trader to see the verifiable and confirmable volume and price movement of the security.
This well-establsiehd system is absent in the Penny Stock market, and the penny stock issues are often lacking a qualified market maker. Usually , the market maker in a penny stock organisation is the very company itself. The fox is in the henhouse, so to speak. What this means is that the Penny Stock company is setting both the bid and ask prices on its own stock. Further , a disturbing number of Penny stocks are traded on the ‘Pink Sheets” which puts it into the category of trading in the wild west.
Well schooled traders have estimated that 9 out 10 Penny Stocks go under within the first year of their offering. I have heard numbers as low as 7 out of 10 talked about, but the point is not overly complicated . When you are day trading Penny Stocks you are playing in a non-transparent, non-exchanged orientated market, and this is the recipe for cataclysm. It is usually just a matter of time.
For the record, I am not saying that all penny stocks are bad or larcenous , just the majority of them, and odds do not favor long term success. Heed my warning and avoid disastern , there are simply too many exchange traded stocks that will earn you plenty money than risking sums of your hard earned money in the Penny Stock Market.
