Stocks And Money Information

Many of us have got reformation from some source about penny stocks. Even many seasoned traders look for penny stocks that can turn out to be next multibagger like Walmart or Microsoft. Many also believe that dealing with penny stock is a risky business. You should avoid such shares always. The chances are you will be throwing good money after bad. 
What is a penny stock? Many countries stock markets have different norms. In the United States the Securities and Exchange Commission (SEC) has classified any stock under $5 as a penny stock. Definitions can vary as some set the cut-off point at $3, while others consider only those stocks trading at less than $1 to be a penny stock.

What makes a penny stock an untouchable? Certain issues must be considered before you decide to buy a penny stock. How much ever hard you or any professional fund manager can try but no meaningful information about such companies can be got. There is hardly any reliable or credible information available based on which one can take informed investment decisions.

Many such shares do not even fulfill the minimum standard to be listed on main the exchanges like NYSE or NASDAQ. So they are listed only in OTCBB and Pink Sheets. Once a company can no longer maintain its position on one of the major exchanges, the company moves one of these smaller exchanges. While the OTCBB does require companies to file timely documents with the SEC, the Pink Sheets has no such requirement. Minimum standards act as a safety cushion for some investors and as a benchmark for some companies. Avoid companies that are listed on these secondary exchanges.

 Many of the companies that are considered to be a penny stock are either newly formed small companies or those which are close to declaring bankruptcy. These companies will generally have a poor track record or none at all- do not ever utter the word “dividend” to anyone these companies.  As you can imagine, the lack any track record of these companies only magnifies the difficulty in picking the right stock.

One does not know when the liquidity of such penny stocks will dry up. When a penny stock doesn’t have much liquidity the stock you purchased cannot be sold. You do not have any exit option and you will be stuck with the shares. If there is a low level of liquidity, it may be hard to find a buyer for a particular penny stock, and you may be required to lower your price until it is considered attractive by another buyer. Also low liquidity levels provide opportunities for some traders to manipulate stock prices, which are done in many different ways – the easiest is to buy large amounts of stock, hype it up and then sell it after other investors find it attractive. Many also do circular trading. A group of traders form cartel and one buys the penny stocks while other sells it. This goes on for a long time creating an illusion of large volumes being traded and prices going up. It is nothing but a trap being set for gullible investors. 

Penny stocks have been a thorn in the side of the SEC and many regulators around various stock markets. This is because the lack of available information and poor liquidity make these groups of stocks an easy target for fraudsters. There are many different ways these people will try to separate you from and your money, but here are two of the most common.

Malicious recommendations: Some penny stock companies pay journals, magazines, internet web sites and investment professionals (many of whom can be seen on TV) money to recommend these stocks. You may also receive spam e-mail trying to persuade you to purchase a particular penny stock. Please check if the issuers of the recommendations are being paid for their services as this is a giveaway of a bad investment. Ensure that any press releases aren’t given falsely by people looking to influence the price of a penny stock.

Off-Shore Brokers- the SEC permits companies selling stock outside the U.S. to foreign investors to be exempt from registering stock. These companies will typically sell the penny stock at a discount to offshore brokers who, in turn, sell them back to U.S. investors for a substantial profit. By cold calling a list of potential investors (investors with enough money to buy a particular stock) and providing attractive information, these dishonest brokers will use high-pressure sales tactics to persuade investors to purchase penny stock.

Be extremely careful when investing on a penny stock. Choosing a good penny stock is like finding needle in a haystack in all probability you will be making more money playing lottery than investing in penny stock.