Penny Stocks - Worth The Hype?

Its amazing how much hype there is around penny stocks.  Its not uncommon to see claims of 500% returns ("easily attained" is how one promoter puts it) - all you need to do is sign up for their newsletter and get access to these great picks.

Ask yourself this question: if you had a money tree in your backyard - would you let anyone know about it?  If you knew of stocks that could move up 500% or more, why wouldnt you just load up, mortgage your entire life savings and sell when you hit your 500% return?  You'd just need to do it once!

Why would these places give away these hot stocks away for free?

They wouldnt - there is no free lunch.

Are All Penny Stock Sites Scams?

Not at all. As a matter of fact, many are quite reputable and have the interest of their subscribers at heart. However, there are a large number of sites that are infamous for pump and dumps.

Small cap companies typically have a great idea, but no one knows about them. So, a small cap promoter will spread the word out there to both small cap investors, and the public at large. Of course, this promotion isn't done for charity. It costs money to not only promote (extensive news releases can cost several thousand dollars), but to pay for space on websites. Many small cap sites use the proceeds from penny stock awareness programs to continue to provide small cap info.

There's nothing wrong with it. The owners of these sites have to eat too! As long as they are straightforward in their disclaimer about what type of compensation they are receiving, you the viewing public can make a decision about what to do.

These sites offer more disclosure than many of the so called professional analysts who give buy and sell recommendations, and significantly more than you see on stock bullboards where "knowledgable" posters promote stocks - but never tell you whats in it for them.

I would rather know that a small cap site is getting paid $5000 to share info on XYZ Widgets Inc than to have someone tell me about a hot stock they like called XYZ.

Facts & Myths

"Penny stocks are the least affected market during a bearish or downtrend cycle"

• Myth - The aggregate price of small cap stocks (less than $1billion in market cap) on July 2, 2007 (before everything fell apart) was $11.17.  On March 9th, 2009 (considered the market bottom), those aggregate price of those same stocks was $4.32 - a loss of 61%
  
  Least affected? Hardly.

"Less capital is required in order to make substantial profits"

• Depending on how you look at it - from a percentage standpoint, yes, you can make a higher rate of return with penny stocks. You can also lose a lot more (see previous example - the S&P500 fell about 40% in the same timeframe vs 61% for small caps).
  
  Can you make a higher dollar return - not always. Many small caps have a small float - and small volume - making it difficult to get a large position.
  
  Smart penny stock investors will invest only $500-$1000 in small caps

"Potential Penny Stock gains can go as high as 100%-500% per stock (within one trading day)"

• Yes, it "can" happen - but rarely. It also involves investing in microcap stocks that are priced well under 1 cent.  With enough momentum, a stock could move from $0.0001 to $0.0002 (100% gain).  Its also just as easy to move from $0.0001 to $0.0005 (50% loss, that requires a 100% gain to get back to break even).
  
  To suggest that it happens on a regular basis is dishonest at best

How To Make Money Trading Penny Stocks

There is plenty of money to be made trading penny stocks - whether they are promoted or not. Here are a couple of tips to help you weed out the stocks that have long term potential, and those that may be subject to a pump and dump.

1. Look for consistent growth in volume. If you see little volume days, followed by large spikes, followed by low volume days, stay away. A company that is growing in volume is a good sign
2. Minimal Volume - you want to make sure that the number of shares you are buying are no more than 5% of the daily volume.  Anything more, and you may end up moving the price up while you accumulate shares, or dropping the price down when you try and sell
3. Look for earnings growth - if you cant find any financial reports (quarterly, annual etc), stay away. You want meaningful earnings growth - not $0.01 to $0.02 type of growth. If the company is successfully selling its products, this shouldnt be a problem.
4. Look at who is recommending the stock - how good are their previous picks - dont judge based on their advertised record - instead, sign up if its free, and keep a running record of how well they do.
5. The stock should be well off its 52 week low. You want stocks on the way up, not on the way down

Taking those 5 tips into consideration, and you'll be fine.