Definition of Penny Stock
Penny stock generally would be considered a small-cap. The peoples tend to treat these terms the way, and in a UK context, a small-cap would have a market cap of less than 500 million. Pound, on the other hand. If you to the very small end, we are in the micro-cap.
The territory that would be less than a hundred million pounds as a round number means the pet that the name is misleading because it does not matter its share price.
Explanation of Penny Stock
Penny Stock Upside
Here is a Penny stock currently trading at only 4 cents per share. If it goes up by just one Penny, which could happen any day now, you will profit by 25%.
And if it hits 10 cents, your profit also increases, and you earn 150%.
Now you think that is great for you. But on the other hand downside of Penny stock.
The downside of Penny stocks
A Penny stock sales pitch does not mention or mentions only passing because there is also colossal downside potential to this Penny stock.
If it goes down by just one penny, you will lose 33% of your money.
And if it goes down and hits the one cent, you will lose your 75% from the four cents you started.
Penny stock is a risky business. A great way how to learn about penny stock trading works?
It’s the movie “The Wolf of Wall Street.” Jordan Befort and his team of brokers are selling penny stocks at 50% commission. And they find even more ways to make lots of money.
Here’s Wolf’s penny stock sales pitch on Aerotyne International: “It’s a cutting edge high-tech firm out of the Midwest awaiting imminent patent approval on the next generation of radar detection that has both considerable military and civilian applications.
The key to making money in a situation like this is to position yourself before the event. The only problem you are going to have with this stock is that you didn’t buy more!”
And that the potential of this as-yet-unknown company is probably never going to materialize.
Not all penny stocks are “unknown” companies though, some companies that have turned into penny stocks used to be quite successful. Sears Holdings Corporation became a penny stock.
Why are penny stocks risky?
The first and most significant reason is the lack of information available to the public—it only applies to the OTC penny stocks traded under $1.
Companies listed on the pink sheet are not regulated by the SEC and are not required to make financial documents available to their investors.
So without this documentation such as the 10K, investors cannot find out their cash flow, operating expenses, and whether they generate revenue.
As for the small-cap penny stocks trading above $1 and are listed on the Nasdaq and NYSE, these companies are required by the SEC to file their financial statements, register for offerings and inform investors of essential updates.
So in that sense, the penny stocks above $1 are a little less risky than the real penny stocks on OTCBB.
However, they are still sketchy and easily managed through misinformation and pump and dumps.
Which is the second reason penny stocks of all prices are considered risky.
Many of these penny stock companies release news and pay promoters to pump their share prices up with sensational headlines.
These penny stock news releases often include keywords in titles such as agreements, contracts, advancement, strategic placement, etc. I call sensational key words. because these sketchy penny stock companies take advantage of the fact that most investors
and traders in the market are lazy, and they do not read past the headlines. And of course, the purpose of this PR pump is to drive shares prices up hundreds of percent, as we have seen in past examples like $OPTT, $BPTH, $YRIV and $ABIO.
As the shares hiked up, that’s when insiders of these penny stock companies start to sell and dump millions of their shares on unsuspecting investors.
Sometimes, these penny stock companies will take advantage of the pumped-up share prices to issue offerings and raise more money for their companies.
We’ve seen examples of these pumps and dumps with OTC stocks. These penny stock companies recruit third party online promoters to send out promo emails and publish false articles.
While many will argue that the NASDAQ penny stocks are regulated and less manipulated than the OTC penny stocks, the truth is these sensational press releases are what’s considered “legal” pump and dumps. In the SEC’s eyes, it is indeed legal to release exciting news about the company to investors.
There have been some extreme NASDAQ penny stock manipulation cases like $LFIN and $HUNT, both of these companies released misleading news to drive their share prices up from under $10 to around $100, basically a 1000% ROI scheme.
Both of these companies were investigated by the SEC and delisted from the NASDAQ stock exchange to OTCBB.
Unless it’s blatant insider trading or manipulation like $LFIN and $HUNT stock, these PR pump and dumps from small-cap penny stock companies are just everyday activities in the stock market. So I want to raise awareness for new traders and investors.
Why are Penny Stocks Bad?
When you buy a penny stock or trade penny stocks, you are fishing in a sewer or a drainage ditch. These kinds of companies and their associated stocks. these are the worst companies
They are almost always terrible businesses run by shady operators, and the stocks are highly manipulated. They have fairly small market caps, usually, so they’re effortless to run pump and dump schemes.
If you google buy penny stocks, you’ll see many of these penny stock newsletters where uh fierce investor penny stock millions. I don’t know anything about these companies. I assume they are complete garbage.
But what they will do is they will often try to get all their subscribers to run into a specific penny stock and because these stocks are so small.
It can drive the stock up. But then, as people try to get out, the stock plummet, so there are many unscrupulous.
Operators in the penny stock arena, what I found is that stocks even stocks
under twenty dollars a share do not trend as well as stocks over twenty dollars, so if you’re looking for perfect momentum stocks and high-quality companies. You always want to look at stocks priced above twenty dollars, now even stocks
under ten dollars. They tend to be even worse. They tend to be much more mean-reverting.
So, for example,
You might have a stock that starts at three dollars it’s trading around three it spikes up to six dollars and then it falls back down to three dollars that’s what I mean-reverting it reverts down to its average trading price now, some people think this might be a profitable trading strategy.
They’re various people who promote this online, but the problem is the risk-reward on shorting penny stocks is just not very good. Because even if you’re able to borrow the shares, which can be difficult to short a stock, you have to borrow the shares from your broker.