Investing in penny stocks is hazardous business with the potential for great reward. A chief hazard is the lack of reliable and timely information. Where there is information, it is often not from a reliable source. The facts and figures can be manipulated by many parties including company officials, promoters, scam artists or by investors attempting to raise the price of the stock. Services that list penny stocks to watch will often include facts about the company that should be double checked for accuracy. Penny stock promoters and penny stock newsletters often have conflicts of interest that make it favorable to paint the company in the best light possible and omit negative details. This makes it difficult to discern the future direction of the stock and underlying company.
Pump and Dump
When there are so many conflicts of interest and little financial disclosure the price of a penny stock is often susceptible to factors unrelated to company fundamentals. One of these factors is called “pump and dump” and the SEC has a good definition. Pump and dump is when a newsletter or so called guru accumulates shares of a penny stock in advance of an event to pump up the share price. Once the price goes up, the shares are sold or dumped at a profit. The event or catalyst causing the share price to increase is usually an email sent out to penny stock newsletter subscribers. In some cases the “newsletter” is nothing more than an email list that is collected over time. The unsuspecting investor sees an offer to receive free penny stock investing advice. But what they don’t understand is they, along with thousands of other investors, will all be receiving an email at the same time. This email will say something like “buy now before you miss out”. When many buyers rush to buy a penny stock this temporarily drives up the price of the stock and then when the excitement fades the share price falls. Awesome Penny Stocks is notorious for using its email list to perform pump and dump with many stocks over several years. One good way to learn how to trade penny stocks is to develop a penny stock watch list. This list will help you gain confidence in your research method and help to determine which sources of information you can trust.
An example of Pump and Dump
Recently a very small company by the name of Yukon Gold Corporation(YGDC) was one of the latest penny stock alerts. However, savvy investors would have put this stock on their list of penny stocks to watch because this turned out to be a classic pump and dump scheme. An email was sent out saying that investors should get in now because there is big potential and the possibility of a huge break out. What savvy investors should realize is this company may have potential but that is about all. It has no earnings and it looks like the company has all but closed. Yahoo Finance shows the following information under company profile.
Yukon Gold Corporation, Inc. does not have significant operations. The company intends to acquire new mineral or other properties, or a business. Previously, it was engaged in the acquisition and exploration of mineral properties. The company is based in Oakville, Canada.
The previous day YGDC closed at $.0085 (that is less than 1 penny) with the company valued at less than $1 million. The average volume over the prior 2 weeks was 1,400 shares per day. The email was received about the time the stock market opened and YGDC ‘s share price quickly climbed to a high of $.0785 (almost 8 cents). The price steadily headed down to end the day at around 4 cents per share. The number of shares traded was about 2.8 million! So if you rushed in to buy the penny stock in the morning when the hype was the greatest you are looking at a huge loss. If you were lucky enough to be a friend of the person that sent out the email and accumulated shares prior to the email and sold in the morning then you pocketed a gigantic gain.
This is another lesson illustrating the risks of penny stock investing. Leave YDGC off your list of top 10 penny stocks to buy, as the time to buy was long before this pump and dump email was sent out. However, add YGDC to your list of penny stocks to watch, as this stock will most likely end up below one penny a share by the time you read this, providing a good example of pump and dump and a valuable lesson in what to avoid when developing your list of penny stocks to watch.
So now you know that you need to stay away from stocks promoted in pump and dump scams. But what are the characteristics of companies that may provide a better chance at profit? Below is a list of the criteria that should be on any watch list.
Five Criteria for Preparing a List of Penny Stocks to Watch
- The company is listed on the NASDAQ, NYSE or OTCQX where financial disclosure is required
- The company has revenue and you believe revenue will increase
- The shares are traded at a sufficient volume so you can buy and sell easily
- You are able to get independent and trustworthy information regarding the company
- Company management has a track record of delivering results and have not been involved in shady scams or penny stock promotions