The Dangerous Secrets of "Great Penny Stock"

Picking Great Penny Stock is something of a controversy. Made famous in the film, 'Boiler Room', penny stock are generally defined as stocks valued at less than $5 dollars. Of greater importance than the stock price is what the stock stand for. Penny stock investors generally hope to make their money from either short or long term investing.

The long term investors are looking to spot the next big thing. They are the talent scouts of the investment world on the look out for a rising star. With good fundamentals (good management, good business model, product and a bit of luck) this company will hit it big. Now those shares you bought for a few cents (and at a few cents a share you can buy lots of them) are trading at tens of dollars. If you get really lucky they might go higher.

The short term traders look to profit within hours, maybe a few days if they are patient. They make money speculatively and are looking for indications a share price is rising and will continue to do so. Once the share hits a ceiling price - sold and the investor walks away with many more times his (or her) original stake.

The long term investors are those likely to take their time. They look at the company earnings, check out various ratios and establish cash flow through the company. They might look at management stocks holdings and are generally giving the company a health check.

The short term investors on the other hand are out for a quick buck. A favourable profit forecast, a development in the economy, anything at all that might double or triple the stock price overnight. Then it's gone, the stock is sold and a new investment awaits.

Any investment carries with it a degree of risk but those associated with finding great penny stock are much higher. That is the great penny stock debate - is the risk worth the reward?

Risk 1:
Due to the smaller company size involved, penny stocks are not traded on any major exchanges. This, in turn, means that the rules around the disclosure of information is much less (to almost non-existant) and you could be investing in anything from a well run firm with "corporate" values to a backyard lemonade making family. Find out the information you need to make an informed decision is a must, research, speak to different brokers, telephone the company if you have to.

Risk number 2

is the lack of liquidity that surrounds these investments. Markets exist on the balance of supply and demand. If there is a demand for stock, there is a market and the price the market pays is down to supply. Not many people want to buy lemonade making business' that they do not know much about, so having bought your penny stock (that you thought were great penny stock) you could have trouble selling them on. Coca-Cola shares on the other hand would be easier to sell because more people are likely to want to buy them.

The last risk is by far the greatest in my book. This puts millions of dollars into the hands of illegal trader world wide every year. This takes millions of dollars of hard earned cash from would be investors (often worried about retirement) and leaves the holding next to nothing. The last risk has been called "Pump and Dump".

Step 1:
The "so-called" great penny stock that you found, that you heard about through that internet forum, that you got that newsletter on.. Well that stock has had its share price pumped up by unscrupulous brokers leaking false information. With very little real information available, these brokers buy penny stock for next to nothing and are able to create a false market. They put information into the 'real world' through the internet, through the media, maybe they even dupe a respected analyst who mentions it on TV. Next you know the share price rises (but with no real business to support it).

Step 2:
Having 'pumped' the stock price upwards, the brokers now sell these great penny stock to unwary investors. Cold calls and spam emails are all used to target their victims who are generally male, middle aged and with money to spend. Pressured sales techniques (boiler room tactics) are used to coerse and force the investor into buying these stocks on the basis that they are 'going to be gold'. They will make your rich.

Having bought the stock for next to nothing, these criminal brokers have artificially inflated the stock price, pressured investors into buying and shut up shop. The demand for the stock starts to dwindle and with no real business fundamentals to keep the price high, they fall back to there next to nothing value. The investors are now left with their savings gone and a portfolio of (apparently) great penny stock that they cannot sell. Almost worse than nothing.

Penny Stocks are high risk investments with the potential for high rewards. If you can find that hidden gem, that stock that will make it through the ranks you're on a winner and you way to massive profits.

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