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Don’t Be Tempted by Penny Stocks

I filter through a lot of news on the internet just about every day as I look for ideas on what I should be writing about. Sometimes I’m looking for news on a particular topic and a totally unrelated news item or article pops up, catches my attention and the next thing you know, that becomes the topic I have decided to write about.

It’s been a while since I have written about penny stocks, but trust me when I tell you I’ve paid my dues where this subject is concerned.

Back around 2000 I was hearing a lot of the same hype about penny stocks that is still being used to promote them today. I had been wanting to try my hand at trading stocks for quite a while leading up to that time and since I was not a rich guy, I decided that penny stocks would be a great way to get started. After all, I could be thousands and thousands of shares of stock, while I found myself quite limited when it came to trading “real” stocks since they were priced much higher.

I made the mistake of frequenting penny stock forums online where various traders were claiming that they were making all kinds of big money on penny stocks. In retrospect, most – if not all – of them were probably just there attempting to manipulate the prices of the stocks to their advantage. I even bought a book by some guy that claimed he made a fortune trading penny stocks. I cannot recall his name right now, but he was probably just another crook.

Not every penny stock I bought resulted in a loss for me, but I’d say about 95% of them did. Even when I reflect on those that made money for me, the amount I made was not all that impressive.

Penny stocks are often promoted by shady individuals who are looking to exploit a penny stock by driving up the price and then selling off their shares before the price comes crashing down again. This is known as a “pump and dump.”

I used to get a lot of penny stock spam, but I have not been seeing it for quite some time now. Penny stock spam was one of the major tools used (and probably still is)by these pump and dump scammers who would send out massive amounts of spam in an attempt to convince potential buyers that the stock was about to “explode” or “go to the moon” which would make buyers a fortune.

Most penny stocks are trash. It’s really that simple. These stocks are priced so low because they reflect the value of the company that issued the stock. It’s really pretty simple when you take some time to think about it. If a company has a bright future and they are on the up-and-up, the stock’s price should reflect that. A stock selling for 5 cents a share tells you that it’s a company that hasn’t proven that it’s going to be much beyond a flash-in-the-pan. Sure, there’s a chance that some pump and dump operators might manage to jack the price up to 10 or 20 cents or more, but if my experience is any indication, that’s a very rare occurrence.

The article I stumbled upon that inspired me to write this was written by a guy named Cody Willard. I guess he is some kind of financial guru with a TV show or something. I never heard of him, but I got totally away from the stock market years ago, so that’s probably why. Anyway, what he says about penny stocks is right on as far as I’m concerned.

I know it’s human nature to believe that you might be the one that gets lucky and buys into a penny stock just before the price takes off. I’m not saying it can’t happen, but I’d guess that the odds are on par with winning the lottery.

If I had a choice between buying a penny stock and going on a daytrip to the casino with my wife, I wouldn’t have to think about it very long. Look for me somewhere among the slot machines. I’ll be the guy whose probably sitting there with an unhappy look on his face as the machines eat my money and give very little back. At least I know I’ll only lose a hundred bucks or so (we never go to a casino without setting a spending limit) and I won’t have to endure weeks, months or years of pain as I see a penny stock “investment” swirl its way down the toilet.

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