Penny Stocks: Watch Out!

Penny Stocks: Watch Out!

penny stocks

Hey guys, it’s been a while since I’ve written a blog post. A few buddies of mine and I are currently competing in a Virtual Stock Exchange game on Marketwatch. It seems many of us have caught on the concept of dumping a large sum of money into a Penny Stock and watching the returns. So I decided to talk about some penny stock tips. Afterall, buying a penny stock for $1 and having it raise 3 cents nets you a 3% capital gain. Not even your savings account will grant you that if you keep money in their account for an entire year! This has inspired me to write a post on what Penny Stocks are and why the general consensus amongst smart investors is to avoid investing in Penny Stocks.

What is a Penny Stock?

A Penny Stock is any stock that is trading for below $5 according to the definition provided by the Securities And Exchange Commission. Some definitions might include stocks that move only pennies per day or those trading under $1.

Penny Stock Tips: Don’t Do It!

Trading penny stocks exposes yourself to a number of high-risk factors.

  1. Many companies are new with their share prices around $0.01. These companies generally lack sufficient historical data and background information to provide investors with educated trades.
  2. Penny stocks tend to be less liquid than non-penny stocks. The stock exchange market is based off buying and selling stocks. If there are no buyers for a certain stock, then selling the stock will be difficult. If selling becomes difficult, the price of the stock will decrease to entice more people into buying.
  3. Third and probably the most important high-risk factor: Penny Stocks are easily manipulated. Since stocks live by the Law of Supply and Demand, the more a stock is bought, the less supply there is. When the supply of a particular product runs low while demand remains high, the price of the product will go up. In this case, the stock prices can be pushed higher from simple mass-buying. Because of this market factor, scammers apply the Pump and Dump strategy to Penny Stocks to make a quick buck off the unsuspecting.

Penny Stock Tips: The Pump and Dump Scheme

The Pump and Dump strategy follows this route:
Scammers will buy a large amount of shares of a Penny Stock. Once the own those shares, they will hire media personnel and marketers to advertise their stock and hype it up. In this event, other investors get interested in the company and purchase shares of the stock. Marketing comes in many forms. They could be newsletters, advertisements, word of mouth, Google Adsense, Facebook Ads, etc. Those of you who are on Marketwatch, WSJ, Bloomberg, CNBC, may have noticed these advertisements in the corner of the page. These are scammers at play and they’re trying to lure you in to play their game.

penny stocks advertisement
Typical Penny Stock Advertisement. Source: Google Images.

 

Once they bait you in, and more people start playing their game, the Law of Supply and Demand kicks in. As more investors buy their stock, the price of the stock goes up. Once it’s at the peak, the scammers pull the rug out from under and sell all of their shares to cash out. Once the selling begins, the stock prices start plummeting leaving the rest of the investors floating out to sea.

Penny Stock Tips: CYNK Technology

One particular penny stock I’d like to point out is the recent pump-and-dump case of CYNK Technology. A company with only 1 employee (the founder itself), a website, no official business office or sales/revenue, managed to rise from a few cents per share up to $21 in only a few days! See the CNBC summary here.

CYNK stock
Source: Tradingview.com

The SEC stepped in and halted all trading of this penny stock for investigations after it had rose so much. The halt lasted for two weeks. When the penny stock opened up again, it had dropped significantly, as most stocks do after an SEC halt, and went back below the $3 range.

One could say that the stock… CYNKed… ( ͡° ͜ʖ ͡°)

As usual, do your research per trading and don’t jump into the grandiose dreams that penny stocks bait people into. Find at least a company with a strong foundation and good fundamentals if you’re looking into penny stocks below $5.

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