The Penny Stock Explanation - video from YouTube

Taking Penny Stock Risks
By: Christopher Smith
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The term penny stocks generally refers to any stocks that trade outside the major stock exchanges and is taken as 'deprecatory'. The major stock exchanges would include: NASDAQ, AMEX, or NYSE. The term Penny stock is also often used interchangeably with small caps and nano caps. The title of penny stock however should be determined by the share price rather than the listing service or market capitalization.

Penny stocks often have market caps lower than $500 million. This makes it highly speculative for those who trade low volumes 'over the counter'. Some believe that penny stocks are difficult to sell once purchased because of the difficulty in locating quotes on particular penny stocks. Investors in these stocks are expected to understand that the loss of their entire investment is a viable risk.

Despite the risks involved, penny stocks are attractive to new investors because of the low initial price and the possibility of quick payouts of up to 100 percent in some circumstances. Just as there is the potential of high profits, that potential comes with the risk of substantial losses.

Penny stocks are considered high-risk investments. As a result investors should be aware that these stocks have a limited amount of liquidity and fraud in addition to a lack of financial reporting.

Penny stocks have fewer shareholders. This makes them less liquid than stocks of larger companies. It also means that it will buy and sell less shares. The fact that less shares are traded generally results in unpredictable stock prices. This can either make the prices rise sharply or suddenly decline. The lack of liquidity within this market leaves it wide open to exploitations by market makers, management, and other parties.

These stocks can also be difficult to sell quickly as some days there simply are no buyers.

Another reason for this lack of liquidity is the minimal listing requirements for smaller market listings as compared to NASDAQ or NYSE. Companies that have fallen below requirements for the larger exchanges have the opportunity to get listed on the OTCBB or Pink Sheets.

If you are comparing Pink Sheets to the major exchanges you might want to take note of the fact that Pink Sheets have very few regulatory requirements for those being listed. In other words, there is little protection in place for shareholders by way of accounting standards, notifications of ownerships of shares, etc.

These things combined make penny stocks very attractive tools for fraud. This does not at all mean that all stocks listed on the OTCBB are untrustworthy, it simply means that you should keep your eyes open when making deals on this market.


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Penny Stock Investing Tips
- From Ezilon.com Articles

Stocks that are traded at a very low cost – under $5 a share – are given the name 'Penny Stock'. In some cases penny stocks may trade for under $1 per share, and sometimes even for under a penny.

Though transacted at very low price, penny stocks can be quite risky. That is why most wise financial investors avoid them even though there is money to be made in this market. High risks exist in this market because of the wildly fluctuating prices of penny stocks. Therefore the first tip for the penny stock market is: try to avoid investing here.

Secondly, if you feel in some way specially attracted to this market, perhaps because you hope to invest small money and gain high returns, be sure to investigate the relevant companies thoroughly and exhaustively before taking a single step in any direction.

Next, when you feel ready to move, be extremely careful. Most penny stocks come from newly formed companies which are virtually unknown, so the investor has hardly any information to depend upon when attempting to make an investment decision. Sometimes belong to companies that are in a very serious financial problem or may be almost on the verge of bankruptcy. It is best to avoid buying unless you know some of the insiders dependably well.

One essential and very dangerous difference between penny stocks and other stocks is that penny stocks can escape state regulatory oversight. In the United States, penny stock companies are not required to release audited financial records. Shareholders have virtually no verifiable information regarding the inner workings of these companies while low per-share price looks highly alluring. As a result, it is easier for corporate insiders to act fraudulently against shareholder interests, and the low per-share price reflects this increased risk of fraud.

This reputation for fraud is often reflected in some terms often used by insiders.
One common technique is known as 'Front Running', or the 'Pump and Dump'. This happens when a small group of traders surreptitiously buys a large block of inactive penny stock shares. As their positions become loaded, they use mongering extremely positive sounding rumors about the company so that the price is pushed up to yield a large profit.

Conversely, spreading false rumor for driving the price down is known as the 'Poop and Scoop'. Anybody rash enough to have invested in these stocks may soon end up penny wise and dollar foolish!

However, it should be remembered that the price being sub-$5 or sub-$1 does not necessarily imply a weak, near-bankrupt company. In the aftermath of the great bear market of 2000, a number of legitimate, fully reporting companies found their shares valued in the pennies. They were technically penny stocks. But the major exchanges typically allowed such companies short-term exemptions to stay listed as long as they meet SEC reporting guidelines.

Hence, trading in such penny stocks may not always drive you towards fraudulent companies and potential losses. This makes the case even more complicated, and stresses the need for deep research before taking entry or exit decisions.

There is yet another high risk pitfall coming from the important difference in how penny stocks are traded. Major exchanges such as the NYSE and Nasdaq do not list penny stocks; instead, they are consigned to secondary markets to the Pink Sheets, for example.

The liquidity measure of how easy it is to buy and sell a stock is much lower in secondary markets than they are in the majors. As a result of the low per-share price, it is not unusual for individuals to hold hundreds of thousands of shares. Often the liquidity disappears soon and it becomes impossible to exit such large positions without severely driving down the share price further.

Hence try not to be attracted by the high liquidity of low stocks in secondary markets. Look before you leap is the word for investing in penny stocks.

The best tip is: never invest in anything you don’t understand. If you don’t understand the penny stock at deeper layers, let it pass.

Peter Leeds will help you pick winning Penny Stocks Click here to view the interview on Penny Stocks, Revealed Peter Leeds is the Penny Stock Professional. His newsletter, Penny Stock Insider, is one of the most popular financial publications in North America. Peter Leeds the Penny Stock Pro, Warns Investors Against the Danger of “Pump and Dump” Stock Practice. Peter Leeds known for his ethical business practice offers tips on how-to-recognize the” real deal” from “Pump and Dump” online scammers. By Peter Leeds, CEO of Peter Leeds Inc. NEW YORK,(RUSHPRNEWS) September 8, 2008 – According to wikipedia, “Dump and Pump” “is a form of microcap fraud that involves artificially inflating the price of a stock through false and misleading positive statements, in order to sell the cheaply purchased at a higher price. Once the scam artists "dump" their grossly overvalued shares, the price falls and investors lose their money”. ( http://en.wikipedia.org/wiki/Pump_and_du mp). I would like to provide you some tips on how to protect yourself against this unethical practice. 1. Don't invest in stocks you hear about in message boards, e-mail spam, unsolicited faxes, or free online websites. OK, so there's only one tip. Wikipedia reports that 15% of the e-mail spam messages you get are 'pump and dump' stock scams. A survey of 75,000 unsolicited emails sent between January 2004 and July 2005 concluded that spammers could make a return of 6% by using this method, while recipients who act on the spam message typically lose 5% of their investment within two days. Thankfully, this dishonest practice has been dramatically curtailed in recent years, thanks to S.E.C. crackdowns, increased investor awareness, and spam-blocking technology. Regulatory bodies have actually come up with some pretty inventive ways to further combat this issue - for example, the subject company of an e-mail spam may face a cease-trade order from the stock exchange for five days. This is not to punish the underlying company, but rather to prevent the pump and dump from working for the crooks. You may ask why there hasn't been more success catching the culprits, putting them in jail, and stopping the practice altogether. Well, in North America there has been excellent progress, and pump and dump originating from the U.S.A. is now almost zero. The problem arises when the pump and dumpers are located overseas, where it is much harder to locate the source, and often impossible to do anything about it once you find them. I have faith that this will change in the coming years. Until then, you may have to delete a lot of junk mail. While focused by necessity on lower priced stocks, pump and dump is not a 'penny stock problem' in my opinion. It is simply another form of crime. Many cities have high crime areas, but does that mean the cities in question are high crime? Similarly, pump and dump practices are dishonest and risky for investors, but that does not mean penny stock investing is dishonest and risky. In fact, good penny stock investors are completely immune to pump and dump, because they would never be duped by such an obvious scam. Even more so, subscribers to www.PeterLeeds.com benefit by only getting involved with fundamentally strong, well-run companies with tremendous upside, which are simply trading for pennies because they are overlooked or undiscovered. Investors who want to start benefiting from penny stocks can learn all about how to trade these shares, and protect themselves from the easily avoidable pitfalls, by visiting my free, online book at click below. As the Penny Stock Professional, I make it my top priority to bring ethics and honesty back into a wonderful market niche that has gotten a bad name from a few bad apples. One of the ways I do this is with my 100% Unbiased Guarantee. 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From this modest beginning to today's own financial success, Leeds learned by mistake and developed LEEDS ANALYSIS, a proprietary system of analysis which enables him to pick winners in the penny stock market and make suggestions in his newsletter. Leeds has helped thousands of others achieve their dreams of greater wealth by subscribing to the PeterLeeds.com newsletter. Media Contact: To request an interview with Peter Leeds, contact his publicist Anne Howard at 310-295-9578 or write her at anne@annehowardpublicist.com. Peter Leeds will provide you with: HOT penny stock picks Give you insider secrets 120% Average growth on his stock picks 90% Accuracy on his stock picks Proven unbiased advice Need proof? Look at the results! Peter Leeds uncovered Questcor Pharmaceuticals when it was trading at $0.50. Within 6 months, Questcor's share price had jumped 428% to $2.64. Here are other recent results. Most of these stocks are still moving! 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