Penny Stocks: Where Is the Transparency?
There are a number of articles written by gurus in the penny stock arena, and usually try to let these articles go by the wayside . But I just read an article that made my blood boil: the article concerned Penny Stocks.
As a 25 year veteran of day trading on both Wall Street and the CME there are very few areas of investing that are infested with more fraud, scamming and outright falsehoods than the penny stock market.
I realize this will get some traders dander up ….but I will back up my statement with hard facts and experience , not all Penny Stocks are scams…but an overwhelming number of Penny Stocks are simply fronts for companies that may/or may not exist .
Here is how the life of a Penny Stock transpires. As I am sure you are aware , most penny stocks are hawked through newssheets and advertising. There are sound reasons for this method of promotion , as the penny stock companies usually promise the newsletter advertisers a block of stock in exchange for manipulating the stock price rise. The newsletter usually touts the “potential” for the stock to rise founded upon certain factors occurring and usually pontificate, at length on the incredible potential the stock has should these “certain” factors occur.
I usually recommend the potential investors in penny stocks contact the stock itself and query them about the financials and potential market venues . Usually these stocks usually are seriously undercapitalized and have little or no revenue revenue to finance their operation . Usually an investor questioning the company will be rerouted to an answering service or the newsletter promoting the penny stock. The SEC believes that the majority of penny stocks fall into the “pump and dump” category. And with good reason.
A normal stock, traded on an exchange, typically has a syndicated network of investment banks designated as a market maker in that stock, along with a floor specialist who facilitates the trading of that stock. This system allows transparency in the trading of any stock and allows an investor to see the exact and verifiable volume and price movement of the security.
This transparent system is little more than an illusion in the Penny Stock market, and the penny stock issues are generally without a specified market maker. All to often, the market maker in a penny stock scheme is the very company itself. The fox is in the henhouse, so to speak. What this means is that the Penny Stock company is setting both the bid and ask prices on its own stock. Further, most Penny stocks are traded on the ‘Pink Sheets” which puts it into the category of trading in the in never-never land, where anything is possible and balance sheets are unaudited .
Reputable trading experts have estimated that 9 out 10 Penny Stocks fail inside the first year of their offering . I have heard numbers as low as 7 out of 10 bandied about, but the point is simple. When you are trading penny stocks you are playing in a non-transparent, non-exchanged oriented market, and this is usually a disastrous event . It is usually just a matter of time.
in summary , I won’t suggest that all penny stocks are fraudulent or scams , just the majority of them, and odds do not favor long term success. My warning is clear and based on years of experience , there are simply too many exchange traded stocks that will earn you respectable and steady money than risking sums of your hard earned money in the Penny Stock Market.
I am a long time institutional and retail trader. I still day trade every day, but usually only from 6 AM to lunch break. After so many years of trading, I take pleasure in sharing some of the knowledge I have acquired in sharing it with those in the early stages of their trading career.
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