Writing is a strong first step toward successful penny stock trading by moving information into your knowledge base. There are two main objects we want to draw information from in this course: the market and you. We’ll get to the further into the market in future lessons, but in Lesson One, we’ll focus on you. One of the best ways to make money working from home.
If you’re like us, any mention of the words “day trading” instantly call to mind an image of Michael Douglas playing Gordon Gekko in Oliver Stone’s Wall Street. If you’re fortunate enough to remain below the median age of those of us here at Stacked Bid, it might more readily call to mind Leonardo DiCaprio in Wolf of Wall Street, but the themes and connotations are the same. Greed, excess, the road to inevitable ruin—these are the popular associations with the stock market in America.
Penny Stocks Lowdown: Understanding the Risks
Investing in penny stocks brings magnificent returns but comes with great risks, so one has to be very careful and cautious while investing in them, especially those involved with oil penny stocks which attracts a lot of investors. There are two factors that pose great threats to penny stock companies which could result in high risk. Most times, they are highly overleveraged and headed for bankruptcy. The breakdown of the risks of penny stocks to watch out for shall be discussed below.
This is fraud at its best. What happens here is that promoters create huge interest in a stock that is so scarce and could be a relatively known or unknown type. Novice investors then buy up the shares and the price goes up. As the stock reaches a certain inflated price, the fraudulent guys sell or dump the stock at a big profit. This leaves investors at a loss. You can find this pump-and-dump scheme in the penny stock newsletters distributed for free, where you will see these unpromising and hyped-up penny stocks list, which investigation found out that, the publisher is being paid to include them on the list. If you get to lay your hands on these newspapers, make sure to read the fine print on its website. There you may see that the publisher is being paid by the companies or promoters to include them.
It has to be brought to your knowledge that there are penny stocks that are not regulated, such as the penny stocks that trade over the counter on the OTCBB or as pink sheet. They are thereby not required to meet any requirement or compliance rule. Due to this, there is a huge risk for any penny stock trader to buy a long-term position as these securities are very vulnerable to different types of scams and manipulations.
This may be termed as the opposite of the pump-and-dump. The investor borrows shares and sells them immediately at a high price in the open market. More like day trading penny stocks, then sit back and hope the company stock falls so he can pounce on the opportunity of buying up sold shares at a lower rate. Scammers use this method to make a lot of profits. The initially borrowed share will then be returned back to the owner and leaves them profit. They make sure company’s stock falls by spreading false rumors about the company. Short-sellers will make money through their cunning method while investors will be at loss.
Lack of Financial Statements
As a very wise investor, when you hear of hot penny stocks, you have to run a background check on the financial statement of the companies involved, to determine whether they are good penny stocks to invest in. The basis of being a good investor is to understand the balance sheet and income statements of the company you are dealing with. The unfortunate situation with most penny stocks is that you cannot observe their financials, meaning that you can’t see more than what you are offered by other investors as there is no hard data to analyze.
A private company sometimes merges itself with a public company. This makes it become publicly traded without going through the traditional methods. This gives the private company room to falsify its financial statements and inflate the stock prices. You can however detect a reverse merger by doing reviews on its business history, then you may detect a patchy activity in its merger, albeit some reverse mergers are legit. This will lead you to the best penny stocks to go for.
As we all know that diamond, gold, and oil have always been enticing. It’s one of the tricks use in scamming investors. One of the most famous mining scam was Bre-X, in the mid-1990s, a company founder claimed he found a massive gold mine situated in Burma. Speculation about this development spread quickly until its valuation, all in gold penny stocks, was worth $4 billion by 1997. The collapse of the company brought huge loss to the investors. They lost everything.
There are two problems when stocks lack liquidity; the first problem is the probability that it will be hard to sell your stock. Finding a buyer can be hard if there is a low level of liquidity and painfully, you may be required to drop the price until it matches what another buyer can afford. Multibagger penny stocks may be promised by some traders having manipulated the stock prices, which can be termed ‘’the second problem’’. This can be done in different ways but the common method is to buy large amounts of stock, promote it by being hyped, then sell it after other investors find it attractive.
How to Avoid Scams
This is what I termed “Penny stocks alerts”; penny stocks generally don’t really provide in-depth financial information, but it will be nice to check whatever financial statements the company releases. Go deeply into the balance sheet to determine if the company has any outstanding debt or liabilities as well as the net cash at hand. If the company’s income statement shows an unbelievable increase in revenues of late, that’s one big sign. You know the reason you are investing is to get a return, so you need to know whether the stock you are about to buy truly has an upside potential, or more like a mirage kind of penny stock. Investors should know that the penny stock world is filled with fraud and manipulation. You have to know about the management’s track record for you to find out if the company’s executives have had legal issues, notable successes or failures and such; however, such berating acts aren’t what penny stocks entail. You should always look before you leap so you wouldn’t fall on wrong hands. Once you have learned how to dodge scammers, you can proceed to buying the penny stock of your choice.