Be Wary of Penny Stock Fortunes When You Buy Stocks On Line

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As an experienced online trader, I am aghast at the fraud and false hype I see perpetuated around penny stocks in the online trading world. There seems to be an entire industry based not on actually trading stock but on exploiting novice traders through the lure of the misleading word "penny" in the term penny stocks.

Penny Stocks Cost Way More Than A Few Pennies

The face-value assumption here is that the barrier-to-entry is low because penny stocks are so cheap. People, this is utter nonsense. Most reputable brokers won't even execute penny stocks for under 1000 shares per order. That $2-per-share penny stock doesn't look so cheap at a minimum $2000 an order, does it?

Penny Stock Trading Is Not For Novice Investors

Furthermore, penny stock trading actually requires a higher level of experience and knowledge than standard stock trading. Penny stocks are most often listed off the major exchanges on quotation services such as the Pink Sheets or the OTCBB (Over-the-Counter Bulletin Board). What this means to you, the investor, is that these stocks are far more risky and susceptible to being manipulated by unscrupulous "market makers." Why?

Penny Stocks Are Risky

Because stocks listing on these quotation services do not need to file with the SEC (Securities and Exchange Commission). This makes it very difficult to ascertain real and verifiable legal and financial information on a penny stock's company. You need to have connections and put in real effort to research and verify data on many of these companies.

Unfortunately, most people are too lazy to do this real work. And broker-dealers know this, which is why you'll find so-called penny stock newsletters and other services where salesmen offer to spoon-feed you all the data you need on the penny stocks you should buy. Guess what, suckers...

If you buy into these you're almost assuredly buying into falsified or at least manipulated data, with the goal being to make a buck off you not to help you make a buck. And the buck they're making off you isn't always obvious. It isn't just the cost of the newsletter subscription or whatever. They're making money off you because they're using you to manipulate penny stock values.

Beware The Pump and Dump Scheme

Basically, because penny stocks have such low value and are so volatile, they're also much more susceptible to price manipulation. Hence the pump and dump scheme. A small, exclusive group of savvy brokers and investors buy up a ton of a low-to-zero value penny stock, then aggressively hype it to their clients and newsletter subscribers. Those clients and newsletter subscribers then rush to buy it up. Because of all the buyers, the stock value shoots up even though its real value is little to nothing.

As soon as this penny stock shoots up in value, that exclusive group of brokers and investors dump the stock. It then crashes in value, leaving a bunch of confused newbie investors with a significant loss.

And no, you probably can't take advantage of the pump phase. Besides the fact that the value will crash faster than you can react to the pump, penny stocks are infamously illiquid. This means they don't trade easily and this means they are often difficult to unload. You can't just put in your sell order and expect it to be gone like that. In all likelihood, you'll be stuck holding the stock desperately trying to sell it while you watch its value crash.

Get Real Before You Try to Get Rich Quick With Penny Stocks

So I encourage you to be very, very cautious when you desire to buy stocks on line. Penny stock fraud is pervasive and potent. If you seek penny stock fortunes, I encourage you to take a step back, take a deep breath, and exercise a little caution and healthy skepticism.