The Penny Stock Delusion: Why You Should Run

How special you feel to be the recipient of this hot tip! This company will turn coal into gold. And then there’s the one that feeds your guilt to go green, like the additive to your fuel that boosts mileage 200%. No doubt, these startups will quickly turn a nickel into a dollar virtually overnight, right? After all, your brother-in-law wouldn’t lead you astray.

Pump and dumps are just that. The promoter preys on your sense of greed or guilt, luring you to buy into the dream. The investor then prays when he wakes up from the nightmare, ready to scream.

First of all, read the fine print on any printed material that touts this rising star. This is the detailed footer, often in light gray 8 point font made to look like a separate document. The revelation that this is a marketing company paid in shares to promote this dog, often located offshore with a seemingly credible name, coupled with the fact that they do not endorse this stock in any way, should be enough to scare away even the most ardent supporter.

Not all penny stocks are pump and dumps but the issue is that even if do you find one that pays off, you may be lured to continue to trade these tenuous types until you do lose all your money. And when do you sell? When you hit a 10% gain? 100% or 500% profit? By far, the winners are the pumpers and dumpers. In this zero sum game, the investor is the loser.

Penny stock pricing can often be influenced with just several thousand dollars. Here’s what happens: the promoters, who incidentally already own millions of shares, lure investors to the trough. As they buy, the stock naturally rises in price, especially as the buying happens quickly. Straight supply and demand. This self-fulfilling prophecy quickly puts you in pforit. You hold on, expecting to hit the promised land of huge returns. But before it does, the insiders suddenly sell, flooding the market with sell orders, hence driving the price back into the abyss. Instantly, your holdings become a fraction of what you paid. They win; you lose.

Of course you blame yourself for poor timing but the reality is that you just got fleeced. Legal it is not but that never stops these charlatans. The Securities and Exchange Commissions of the world have bigger fish to fry. Some countries don’t even have effective regulatory agencies.

My rule of thumb is simply this: stay with the tried and true, blue chip through and through. Never hesitate to use the delete button and, as well-meaning as your brother-in-law may be, do your own homework when investing.

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