I’m sure we’ve all seen an ad at some point relating to someone making huge profits when buying penny stocks online. But what they aren’t telling you is the risks involved with investing in these types of stocks. Penny stocks are basically any stock that is worth below five dollars. The businesses that own stocks in this micro cap category are either on the verge of bankruptcy or they are a startup company.
Because the stock price is so low there is potential for people who purchase high quantities of the stock to manipulate the price. How does this manipulation work? This usually starts with a penny stock guru. You can find them all over the web when searching for penny stocks. These gurus are usually trying to start a pump and dump.
How does a pump and dump work?
When a stock guru decides to do a pump and dump the first thing they look for is a low value stock that they can easily manipulate. When they find the ideal stock the next thing they do is buy a high quantity of this stock at a cheap price. They convince everyone following their trades to invest in this stock and promote it as their number one pick. After enough people have invested in this stock the guru then sells all of their stock for a nice profit and everyone else is left with worthless stock.
One of the easiest ways to spot a site that is looking to manipulate the price of a stock is to find one that offers free advice. I’m not saying every site that offers free advice is looking to do this but we have to ask ourselves. If that isn’t the case then why is the advice free? Instead of looking at these guru’s websites to buy penny stocks online I like to do my own research.
I like to look for companies that are showing some good news for genuine potential growth. If a company has been talking about how they have a product coming out soon and the product sounds promising then that’s a good indication that the stock could potentially move up. If they have released products in the past it wouldn’t hurt to look at stock trends. If the last product they had with a similar amount of buzz caused the stock to move up then there’s a good chance of this happening again. But always remember in the land of penny stocks nothing is guaranteed.
Make sure these types of companies have a decent amount of buzz otherwise you could end up with worthless stock that you’re unable to sell. The bottom line with penny stocks is to never trade with money that you can’t afford to lose. A pump and dump is just one example of the risky behavior involved with penny stocks so do your research before investing in them.