Pitfalls of investing in Penny Stocks

Traderji

Super Moderator
#1
Pitfalls of investing in Penny Stocks

Penny stocks have always been considered speculative and easily manipulated.

By influencing investors with misleading data on a company, fraudulent brokers or companies can hype up the price of a stock, then sell their own shares once the price reaches a certain level. This scam, known as "pump and dump," is practically as old as the stock market.

Since the earliest days of the stock markets, promoters, phony research groups and unscrupulous brokerage firms lured novice investors into believing a given penny stock was the next Infosys.

Often, they do not actually explain why a company is so successful or what it actually does; they distract readers with fancy financial charts and details of their successful track record.

They then try to suck you in with these huge returns, but there's no accountability as to what's behind them. Big increase in trading volume or sudden changes in a stock's price, especially when limited financial data on the company is available, may indicate that some sort of fraud or manipulation is taking place.

I personally believe that only investors who are able to do the necessary research on a company -- and who are prepared to lose 100 percent of their investment -- should get involved with penny stocks!

Of course, there are a few tales of hidden riches. But for every miracle, there are thousands of losers. When you look at financial markets from a distance, there are many sheep and a few wolves!

You don't make money by buying penny stocks. You make money by selling penny stocks, not as an investor, but as a stock broker. The stock brokers are the principal ones making a killing in the penny stock business, not the naive investor. As all of you must be knowing, they charge huge commissions when compared to the price of the penny stock.
 
#2
Well said traderji.

I remember when I first started investing I used to scour the Economic Times to look for stocks below Rs. 5.00 (during the bull markets of 1992 & 1994) and I still have 80% of those worthless stocks today.
 
#3
Dear Traderji,
Good Comments on Penny, Is Birla Vxl India is a penny stock. How can u determine a penny stock bcos I guess u can't find by the volumes 3 months before Glenmark pharma was trading only in thousands. So can u say what are the criteria to find out penny stocks.

Thanks,
Vijay
 

Traderji

Super Moderator
#4
There is no hard and fast rule to define penny stocks. The SEC in the US defines penny stocks as those stocks whose share price is below $5.00

In India, we can define penny stocks whose value is less that Rs. 25.00

While many legitimate companies have share prices that low, the term "penny stocks" usually refers to highly speculative companies with little or no real business that are heavily promoted by unscrupulous, hard-selling brokerage firms!
 
#5
Traderji said:
In India, we can define penny stocks whose value is less that Rs. 25.00

While many legitimate companies have share prices that low, the term "penny stocks" usually refers to highly speculative companies with little or no real business that are heavily promoted by unscrupulous, hard-selling brokerage firms!
You could'nt have put it in better perspective Traderji. Your first post starting this thread was pretty exhaustive & real.
 
#6
Thank you very much Tradergi for educating about penny stocks. I, otherwise. was willing to take plunge into that. You really are very good guide in all respects. Your forum is a must for me everyday, without fail.

Bahuguna
 
#7
Did you know that a huge number of small companies got themselves relisted last year to take advantage of a booming market. Since January 2004, more than 200 companies have got themselves re-listed.

Some of these stocks were delisted by the exchange for non-compliance with various clauses of the listing agreement. A few of them failed to submit their quarterly results, and some failed to declare their book-closure dates.

Many of the companies that have been relisted have done so for normal reasons, too. Most of these companies are from the B and Z groups. The spurt in valuations of mid-cap stocks has also led to an increase in the average number of B and Z group stocks traded on the BSE.

The broker-promoter nexus is alleged to work in the following manner. It starts with the promoter giving the broker a tip that his company may be about to receive a big order, following which the broker picks up a large chunk of stock.

This sudden buying activity is enough to raise the price of a Rs 2 stock to Rs 4 or Rs 6. This story is then passed around to other members of a broker coterie, and the collective buying interest raises both volumes and prices, making the rally appear genuine.

As brokers start passing the good news around to clients, retail investors start getting into the act, and soon enough genuine retail interest pushes the shares up further.

At this point, the promoters and brokers start disinvesting, steadily sending the shares price downwards. The promoters make a killing by selling high and buying back the shares when the share hits bottom once again.

There is no shortage of suckers who fall prey to penny stocks on Dalal Street. Their logic is simple: it is easier to visualise a Rs 2 share rise 100 per cent to Rs 4, than to see an Infosys double from Rs 2,000 to Rs 4,000.
 

4candles

Well-Known Member
#8
Thanks for such a article Traderji & Mohan. So much in one page. Everybody should realise the risk associated with penny stocks. I belive this thread should be refreshed very often so that all the new members dont miss it & the old members review it.

thank you
4candles
 

sudoku1

Well-Known Member
#9
Pitfalls of investing in Penny Stocks

Penny stocks have always been considered speculative and easily manipulated.

By influencing investors with misleading data on a company, fraudulent brokers or companies can hype up the price of a stock, then sell their own shares once the price reaches a certain level. This scam, known as "pump and dump," is practically as old as the stock market.

Since the earliest days of the stock markets, promoters, phony research groups and unscrupulous brokerage firms lured novice investors into believing a given penny stock was the next Infosys.

Often, they do not actually explain why a company is so successful or what it actually does; they distract readers with fancy financial charts and details of their successful track record.

They then try to suck you in with these huge returns, but there's no accountability as to what's behind them. Big increase in trading volume or sudden changes in a stock's price, especially when limited financial data on the company is available, may indicate that some sort of fraud or manipulation is taking place.

I personally believe that only investors who are able to do the necessary research on a company -- and who are prepared to lose 100 percent of their investment -- should get involved with penny stocks!

Of course, there are a few tales of hidden riches. But for every miracle, there are thousands of losers. When you look at financial markets from a distance, there are many sheep and a few wolves!

You don't make money by buying penny stocks. You make money by selling penny stocks, not as an investor, but as a stock broker. The stock brokers are the principal ones making a killing in the penny stock business, not the naive investor. As all of you must be knowing, they charge huge commissions when compared to the price of the penny stock.
FLASH BACK from traderji >

again & again the same story repeats & traps newbies.....
time 2 clean the penny stocks & dude portfolios;)
 
#10
Dear Traderji,
Good Comments on Penny stocks.The financial position of a company can determine how fair is to invest in penny stocks of that company.
 

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