What is the first thing that jumps to mind when you hear the words “penny stock”? Get rich quick! Opportunity! Excitement! Investing in the next Big Thing! Handle with care! Danger! Let’s take a look at the optimistic view of penny stocks, let’s take a look at the pessimistic view of #pennystocks, and show you how to avoid being the sucker in penny stock trading.

⏱️TIMESTAMPS⏱️
00:00 Introduction to penny stocks
00:27 Penny stock gains and losses
01:29 How penny stock trading works
03:06 Pump and dump
07:03 Penny stock short selling
08:23 SEC charges on pump and dump
09:22 Penny stock market capitalization
11:08 Penny stock manipulation

Penny stock upside. Here’s a penny stock currently trading at only 4 cents per share. If it goes up by just one penny, which could happen any day now, you’re looking at a 25% gain. And once it hits 10 cents, you’re up 150%. How does a 150% return on your money sound to you? Yeah, that DOES sound great! And 4 cents per share is pretty affordable, right? What a penny stock sales pitch doesn’t mention, or mentions only in passing, is that there is also huge downside potential to this penny stock. If it goes down by just one penny, you’re looking at a 33% loss. And once the penny stock hits 1 cent, you’re down 75% from the 4 cents you started at. Penny stocks are a risky business. Why would people focus so much on the upside potential? Well, there’s a lot of money to be made in penny stocks, but not necessarily for you as an investor!

A great way to learn how penny stock trading works, is to watch the movie “The Wolf of Wall Street”. Jordan Belfort and his team of brokers are selling penny stocks at 50% commission, and they soon find even more ways to make lots of money. Like manipulating share prices in an IPO, but that’s a different story: https://www.youtube.com/watch?v=4t62BEH9Ajs

The main purpose of this video on penny stocks is to teach you how not to be a sucker. It is important to understand how an illegal “pump and dump” scheme works, to avoid getting suckered into it. Here’s a typical penny stock share price graph. Usually trading at, you guessed it right, a few pennies. Here’s what “pump-and-dumpers” do: step 1 they buy shares of very low-priced, thinly traded stocks, step 2 they spread false or misleading information to pump up the price (or pay somebody else to do this for them, to create a smokescreen around their identity). There’s no guarantee for a “pump and dumper” that his misleading information gets picked up and spread around social media and chatrooms. If it doesn’t, he just writes another piece of misleading information and hopes that that one will work. If it does work, then they go to step 3: they dump the shares once the price peaks. Big gains for the “pump-and-dumpers” (buy low and sell high, with an illegal high that you created yourself), big losses for unsuspecting investors that fell into the trap.

You can learn a lot from actual cases that the Securities and Exchange Commission details on its website, in a section called “spotlight on microcap fraud”. This page has news updates on the SEC filing charges, so you can find out who is involved in these and avoid doing business with them, as well as learn general lessons of how this fraudulent activity works. An example that the SEC gives of the effects of penny stock manipulation is “As alleged in our complaints, elderly and unsophisticated investors have lost millions of dollars as a result of these boiler room schemes.” There are real people losing real money here. The SEC also provides a very useful list of potential red flags that help you detect possible trouble when you do the right research prior to making an investment decision!

Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better #investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!