The only way – absolutely the only way – which can guarantee not losing money playing penny stocks, especially the Pink Sheets, is to stay away from them. However, the wild stock price swings which are inherent with many penny stocks is what lures traders and would be traders.
If you are hell bent on trying your luck in this Wild Wild West part of the Market, you should minimally understand the following:
1. A majority of penny stock companies are either outright scams or predestined to fail because of ill-conceived business plans.
2. In the case of Pink Sheet stocks, the vast majority are scams. The primary reason for the existence of most of them is to make money by selling shares.
All to often, those running the companies have no intention of building a real business. One of my favorite stories is that of a Texas “oil and gas company” which rolled out a series of PR’s intimating that the company was negotiating with various entities to operate oil wells in Texas. The PR’s and some well-placed pumping on internet message boards had created a buzz and the rubes were buying.
The company was listed as being headquartered in Houston. A friend of mine who lived in the city decided to pay the CEO a visit. He found the headquarters located in a run-down, two-story building in a seedy part of the city. The office proved to be jail cell sized room with a single chair, a card table, a laptop, a phone and the CEO.
Before putting money into penny stocks, do some research. By research, I do not mean reading message boards. Find out if the company is a legitimate operation. Does it have a track record? Does it have a real product or service? Perhaps most important is the background of the CEO. Unfortunately, because of limited to non-existent reporting requirements, such information is often difficult, if not downright impossible, to find. In the absence of evidence to the contrary, assume these companies are scams.
With respect to penny stock CEO’s, most seem to have been separated at birth from politicians. Believe nothing they have to say unless it can be independently verified.
The following strategy has worked for one trader I happen to know, but understand that he puts in hours upon hours of research before risking as much as a penny. At any given time, he holds stock in several pennies, all of which he has bought down in the triple zeroes, often at 0.0001. These are stocks which have a history of moving up from an oft-repeatedly bottom and falling back down again to that bottom. He buys only at that bottom, sells on any upward move and then waits to re-buy at the bottom.
Do I recommend you do the same? No, not unless you have done the requisite research and fully understand the risks.
If you find a company you are convinced is legitimate and has a chance to succeed, don’t fall in love with it waiting for the Holy Grail. Take profits when and if you can. Be prepared to bail out at a moment’s notice.
If you are lucky enough to have bet (there is no such thing as investing in a penny stock) on a stock which moves up after you have bought it, try to take out enough profit to insure you are riding free shares in any quest for that Holy Grail.
What if you determine a company is a scam? Well, a few savvy traders manage to turn profits playing scams, but they invariably fully understand the game. It’s not for the novice.
Are there any shortcuts to finding good information and doing extensive research? Yes, there are a large number penny stock picking newsletters and programs, but most are as shady and corrupt as most penny stock CEO’s.
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