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Trading Penny Stocks
Penny stocks are traded by novices as well as professionals. Some traders use penny
stocks as a tool to learn trading, while others are more adept at making money in
this market. Penny Stocks are cheap, and that is why they are called penny stocks,
although not always costing a penny most penny stocks range in price from $5.00 to
Most investments into penny stocks turn into losses. There are many reasons for
this, a main reason is that the company shares very little information
with the public while doing almost anything to keep their operation afloat. They might have a great idea but lack in funding, therefore they dilute their shares looking to raise capital in that manner.
Trading penny stocks is more appealing than investing and also more successful. When trading a penny stock your only concern is to buy low and sell higher. You can ride the business cycle and news output of a company and make money even if they’re not ever successful.
All that being said, companies have to start somewhere and there are plenty of success stories. Where companies began as penny stocks, worked their way up the system becoming successful companies who begin trading on the major exchanges as non otcbb stocks. Mostly though the penny stock ranks are for companies who fail and “penny stock scams”.
Penny stock scams come in many forms. The more common scams are companies who promote themselves using news releases and promotions to drive up the price of the stocks and then they dilute their shares into the volume. This way as their selling new shares into the float, the price doesn’t drop giving them maximum price for their diluted shares. To complete this scam the companies will usually allow interest in the stock to slow down a bit and then they will file to reverse merger. Which just means they cut down the amount of shares in the float. In larger companies this is a good thing but with penny stocks this just starts the process of dilution all over again. You can see where the incentive to make profits in this manner appears when a company just isn’t making it.
Another big scam is the “pump and dump”, this scam and penny stocks are synonymous with one another, this scam comes in many variations even in the aforementioned scam. Basically shares of the stock are held tight by a few. The price is driven higher and higher through “pumps” fake press releases, message board chatter, and promotions through various websites. Once this stock gains greater value, the shares held tightly are “dumped” into the open market leaving shareholders who bought the hype with a drastic loss.
Penny stocks are a great way to begin dipping you feet into the trading world. Traders who enter this market will take some losses but there will also be huge gains. There is nothing like buying a penny stock based on your due diligence and watching it skyrocket to hundreds and sometimes thousands of percent of the price you paid. This may sound unusual, but it isn’t, in fact this happens all the time in the penny stock market. Anything that goes up thousands of percent, will also come down that much and maybe more, making the timing of your purchase even more important. What can be one persons incredible gain can also cost another person
their entire investment.
About the author: Keith Guyette M.Ed, J.D. is a professional trader and the owner of a stock talk board http://www.thepennystockblog.com