| Many of us have got reformation from some source | | | | particular penny stock, and you may be required to |
| about penny stocks. Even many seasoned traders | | | | lower your price until it is considered attractive by |
| look for penny stocks that can turn out to be next | | | | another buyer. Also low liquidity levels provide |
| multi-bagger like Wal Mart or Microsoft. Many also | | | | opportunities for some traders to manipulate stock |
| believe that dealing with them is a risky business. You | | | | prices, which are done in many different ways - the |
| should avoid such shares always. The chances are | | | | easiest is to buy large amounts of stock, hype it up |
| you will be throwing good money after bad. | | | | and then sell it after other investors find it attractive. |
| What is a penny stock? Many countries stock | | | | Many also do circular trading. A group of traders form |
| markets have different norms. In the United States | | | | cartel and one buys the penny stocks while other |
| the Securities and Exchange Commission (SEC) has | | | | sells it. This goes on for a long time creating an illusion |
| classified any stock under $5 as a penny stock. | | | | of large volumes being traded and prices going up. It |
| Definitions can vary as some set the cut-off point at | | | | is nothing but a trap being set for gullible investors. |
| $3, while others consider only those stocks trading at | | | | Penny stocks have been a thorn in the side of the |
| less than $1 to be a penny stock. | | | | SEC and many regulators around various stock |
| What makes these untouchable? Certain issues must | | | | markets. This is because the lack of available |
| be considered before you decide to buy any stock. | | | | information and poor liquidity make these groups of |
| How much ever hard you or any professional fund | | | | stocks an easy target for fraudsters. There are |
| manager can try but no meaningful information about | | | | many different ways these people will try to |
| such penny stocks can be got. There is hardly any | | | | separate you from and your money, but here are |
| reliable or credible information available based on | | | | two of the most common. |
| which one can take informed investment decisions. | | | | Malicious recommendations: Some penny stock |
| Many such shares do not even fulfill the minimum | | | | companies pay journals, magazines, internet web |
| standard to be listed on main the exchanges like | | | | sites and investment professionals (many of whom |
| NYSE or NASDAQ. So they are listed only in OTCBB | | | | can be seen on TV) money to recommend these |
| and Pink Sheets. Once a company can no longer | | | | stocks. You may also receive spam e-mail trying to |
| maintain its position on one of the major exchanges, | | | | persuade you to purchase a particular penny stock. |
| the company moves one of these smaller exchanges. | | | | Please check if the issuers of the recommendations |
| While the OTCBB does require companies to file | | | | are being paid for their services as this is a giveaway |
| timely documents with the SEC, the Pink Sheets has | | | | of a bad investment. Ensure that any press releases |
| no such requirement. Minimum standards act as a | | | | aren't given falsely by people looking to influence the |
| safety cushion for some investors and as a | | | | price of a penny stock. |
| benchmark for some companies. Avoid companies | | | | Off-Shore Brokers- the SEC permits companies selling |
| that are listed on these secondary exchanges. | | | | stock outside the U.S. to foreign investors to be |
| Many of the companies that are considered to be a | | | | exempt from registering stock. These companies will |
| penny stock are either newly formed small | | | | typically sell the penny stock at a discount to |
| companies or those which are close to declaring | | | | offshore brokers who, in turn, sell them back to U.S. |
| bankruptcy. These companies will generally have a | | | | investors for a substantial profit. By cold calling a list |
| poor track record or none at all- do not ever utter | | | | of potential investors (investors with enough money |
| the word "dividend" to anyone these companies. As | | | | to buy a particular stock) and providing attractive |
| you can imagine, the lack any track record of these | | | | information, these dishonest brokers will use |
| companies only magnifies the difficulty in picking the | | | | high-pressure sales tactics to persuade investors to |
| right stock. | | | | purchase penny stock. |
| One does not know when the liquidity of such penny | | | | Be extremely careful when investing on a penny |
| stocks will dry up. When a penny stock doesn't have | | | | stock. Choosing a good penny stock is like finding |
| much liquidity the stock you purchased cannot be | | | | needle in a haystack in all probability you will be |
| sold. You do not have any exit option and you will be | | | | making more money playing lottery than investing in |
| stuck with the shares. If there is a low level of | | | | penny stock. |
| liquidity, it may be hard to find a buyer for a | | | | |