Some free advice regarding penny stocks and listening to "pickers":
In general, these people are not professional traders, and if they tell you this is what they do for a living, it is because they are unemployed! It is much easier to go out and get a $50k job, then to try to make $10k in profits trading stocks.
Penny stocks are dangerous. You really need to be careful, as you can lose a ton of money fast. Here are some things to think about:
1. Penny stocks are speculative - This means their operations are most likely not going to turn a profit. On the big exchanges, stocks will go up based on their financial results. The financial results of almost all penny stocks are not going to be good, which will only drive the stock down. This is why it is dangerous to hold a penny stock, because their results are not going to move the stock.
2. Penny stocks move on hype/promotion or on supply/demand - This means that a promotion will send the stock up, but it will come back down after the promotion has ended. Hype before big news will move a stock, but after the news is out, the stock will usually go back down. When a company has shown they like to dilute the stock by selling shares, it creates excess supply, so the stock will go down. Since all penny stocks need money to run their operations, they will need to sell shares, which increases supply. Holding a penny stock is dangerous because supply is constantly getting bigger, while demand is usually not, which makes a stock go down.
3. When you are buying, someone else is selling. When you are selling, someone else is buying. - There are people out there who have more information than you and I. Information is power and it is illegal to trade on nonpublic information, however, there are many groups of people and companies trading on the information you do not have. They have a huge advantage compared to you, so be careful, because these people cannot make money, unless they are tricking someone else into taking the opposite side of the trade from them. ie: they need to sell the shares to someone to make money, so they will create lies to get suckers to buy the stock.
There are a few ways to make money in penny stocks:
- Follow the money: If someone is buying the stock with no news, then something is going to happen
- Ride the pump: You buy a promoted stock, but sell when the run is slowing down
- Own the stock before everyone else: Use stock screeners to find companies that have a good chance of a big future or who might get promoted down the road
Never invest more than you can afford to lose, and limit your exposure to penny stocks, as you can get burned quickly. Penny stocks have the potential to make some very large gains, but they are few and far between, so hang around and be patient!
Credit goes to Brian on the wealthy penny board for this article.