Penny Stock Dangers

The ups and downs of trading penny stocks

Welcome to our penny stock dangers page. The purpose of this page is to give you a little insight to the dangers of trading penny stocks. Penny stocks can give you the best rewards

but can also leave you broke with no money to even buy a can of coke. You have to remember in every business you get the good and the bad and with penny stock trading you will get that too. Most penny stock company’s run their business from day to day trying their hardest to make their company grow into something real to ensure their share holders make money from their investment. Alternatively, there are the worst of the worst pump and dump scams, boiler rooms, and yes they do exist.

Penny stocks operate on a few different market exchanges that are mostly unregulated by the Securities and Exchange Commission these are known as the "Pink Sheets and octbb". The chances of finding a real legitimate company penny stock is rare. Most penny stocks are simply shell companies that go through cycles of reverse splits, name changes and dilution and then start the process over and over again leaving share holders with little or no money. Penny stocks can make you rich or make you poor fast! A penny stock can be up 500 the next day on speculation or news or a classic pump and dump.

Hear are few terms that might help you on your way to become a smart penny stock trader.

Pump and Dumps

At some time on the net you might have received an email or possibly an advertisement that claims you need to immediately "invest" in a penny stock, you may have been a target for pumping and dump. The idea behind this is to create excitement and hype for a penny stock, the pumper already owns, at a reasonable price lets say $0.50, he then posts out emails, spams all the message boards, then as his victims buy into his hype and drive up the price of the stock significantly, the pumper sells his shares for a large profit lets say $1.20. Meanwhile, those that bought into the hype will quickly lose their money as the upward stock momentum drops and the stock price heads south very quick.

Reverse Splits

Reverse splits are usually bad news for penny stocks and could be the sign of a typical scam, this is not always true, just some times. So what is a reverse split? Note this is a typical example of a repeat offender. Reverse split is where XYZ is trading at say $1.00 and they dilute the share price by adding more shares to the float using S8 filings or pipe finance to raise money. As the shares get sold into the market the share price goes down as there are many more shares in the float with continued dilution the share price goes to $0.05 cents, now they do a reverse split so they would do a 20 to 1 reverse so every 100 shares you own you would now only have 5 you have a lot less chance to make money now as the stock has to move a lot for you to make money as your holding less shares. Reverse split or roll back as sometimes its called are also geared to make the share price look better "this also helps to get pipe finance with a higher share price" and this process may start again. Always look for repeat offenders and stay away.

These are just a few tips you might want to look into, do your homework well. It is very important to check the history of a company before investing. This can be achieved pretty easily, the one I use is pink sheets. You can just enter the ticker and it pops up with the companies profile. What you are looking for is the amount of reverse splits the company has done in the past, the number of name changes, i.e.: who they were before they sold the cure for cancer could turn out they were a pizza palour just last week – this should give you a red flag to be very careful.

1 Always take your profit, never let it run into a loss

2 Do not trade with emotion or you could lose your money

3 Never chase an already running stock

4 Never believe bashers or hype on message boards, do your own DD

5 Always use a solid stop loss system and stick to it

6 Know when to sell, set your realistic sell target and stick to it

7 Use the charts to find momentum direction, be careful as sometimes they can be wrong

8 Never get too greedy or you might find the rug pulled from under your feet very quickly

9 Never fall in love with the stock you trade

10 Know your exit and stop loss before you even start

When you trade penny stocks only trade if you can afford to lose your entire investment.