What are penny stocks and why are so many investors and traders new to the stock market
drawn to them?
In this video, I’ll be breaking down what penny stocks are for beginners, the truth
behind these companies and what i believe to be the smarter way to profit from these
penny stocks as a small time day trader and investor.
If that sounds like an interesting topic to you, make sure to subscribe, ring that notification
bell and drop me a like for more free penny stock trading videos on this channel.
Let’s get started.
We all know that investing in shares of a stock means you are owning small percentage
stakes of established companies like Apple, which has a market cap of 900 billion.
Market cap refers to the total dollar value of a company’s outstanding shares.
And it’s used by investors to determine a company’s size.
Penny stocks, are companies with a much smaller market cap than our example Apple.
Generally speaking, penny stocks are companies with a market cap less than $300 million (micro
caps), some even less than $50M (nano cap).
Definitions vary but the Securities exchange commission classifies penny stocks as companies
traded under $5.
And many of them, if maintained above $1, are still traded on the Nasdaq or the NYSE,
the regulated stock exchanges.
However, the true penny stocks, are companies traded below $1.
These are what we call pink sheet stocks, which are the companies Jordan Belfort pumped
in the movie, the wolf of wall street.
And they are traded on OTCBB, Over the counter bulletin boards.
And I will be comparing these two kinds of penny stocks in just a second.
So why are these penny stocks considered risky?
The first and the biggest reason is the lack of information available to the public.
This really only applies to the OTC penny stocks traded under $1.
Companies listed on the pink sheet are not regulated by the SEC and are not required
to make financial documents available to their investors.
So without these documentations such as the 10K, investors cannot find out their cash
flow, operating expenses and whether or not these companies are actually generating revenue.
As for the small cap penny stocks trading above $1 and are listed on the Nasdaq and
NYSE, these companies are required by the SEC to file their financial statements, register
for offerings and inform investors of important updates.
So in that sense, the penny stocks above $1 are a little less risky than the true penny
stocks on OTCBB.
However, they are still sketchy and easily manipulated through misinformation and pump
and dumps.
Which is the second reason penny stocks of all prices are considered risky.
Many of these penny stock companies release news and pay promoters to pump their share
prices up with sensational headlines, like i’ve talked about in many of my previous
penny stock videos.
These penny stock news releases often include keywords in the titles such as “agreements”,
“contracts”, “advancement”, “strategic placement” etc.
These are what I call sensational key words.
Because theses sketchy penny stock companies take advantage of the fact that most investors
and traders in the market are lazy, and they do not read past the headlines.
If you’ve actually dive into reading and analyzing the entire PR articles like i have
in my past videos, you’ll see that most of the time, the content is really all fluff,
and no real promise in the company’s potential earnings.
And of course the purpose of these PR pump is to drive shares prices up hundreds of percent
as we have seen in past examples like $OPTT, $BPTH, $YRIV and $ABIO.
As the shares hiked up, that's when insiders of these penny stock companies start to sell
and dump millions of their own shares on unsuspecting investors.
Or sometimes these penny stock companies will take advantage of the pumped up share prices
to issue offerings and raise more money for their companies.
We’ve seen examples of these pump and dumps with OTC stocks.
These penny stock companies recruit third party online promoters to send out promo emails
and publish false articles.
While many will argue that the NASDAQ penny stocks are regulated and less manipulated
than the OTC penny stocks, the truth is these sensational press releases are what’s considered
“legal” pump and dumps.
And we are now treading in the grey area now.
It is indeed legal, in the eyes of the SEC, to release exciting news about the company
to investors.
There has been some extreme NASDAQ penny stock manipulation cases like $LFIN and $HUNT, both
of these companies released misleading news to drive their share prices up from under
$10 to around $100 basically a 1000% ROI scheme.
Both of these companies were investigated by the SEC and delisted from the NASDAQ stock
exchange to OTCBB.
But let’s be real here, these two companies being delisted only represent less than 1%
of all the penny stock pump and dump schemes in the market.
Unless it’s really blatant insider trading or manipulation like $LFIN and $HUNT stock,
these PR pump and dumps from small cap penny stock companies are really just everyday activities
in the stock market.
So i just want to raise awareness for new traders and investors through this educational
video.
Penny stocks are inherently risky investments.
It’s safer to always be skeptical of penny stock promotions, PR releases, and penny stock
chat room recommendations.
Always do your own due diligence in the company.
While I do think some penny stocks can provide great profit opportunities for day trading
and swing trading, I would AVOID investing in penny stocks all together unless you have
real inside information about the company.
Two very common misconceptions about penny stock investing is that many of today’s
big companies like apple and amazon were once penny stocks themselves, and that if an investor
can buy into the investment at twenty cents a share today, then he or she can make a fast
100% if the stock runs to forty cents tomorrow.
Both of these misconceptions are not 100% true at all.
We must remember the single purpose why private companies choose to go public.
Companies go public and sell their stock shares to investors in order to raise money, to fund
their research and potentially develop products to sell.
Stocks are not listed to make investors money, that’s not the priority anyways, they’re
there to move capital from your pockets to the companies bank accounts.
And if the companies are truly profitable and legit, then their stocks will rise in
prices and make investors money.
That is only true for profitable companies with real products like apple.
The reality is most penny stocks are actually losing money and do not have real products
at all.
Instead, they just keep on selling their shares to investors and raise more cash to operate
and pay their board members until they one day go bankrupt.
In those unfortunate cases the penny stock investors lose 100% of their investments and
the insiders walk away clean with their salaries and bonuses, paid by the investors of course.
While it is true the price fluctuations of some penny stocks from twenty cents today
to forty cents tomorrow could potentially make some investors 100% ROI.
What most people fail to see is the downside as well.
The price of the penny stock could just as easily drop to five cents tomorrow, in which
case, the investors lose 75% of their money in just two days.
And very often when these penny stocks get delisted from the NASDAQ exchange to OTC.
and their share prices just kept on dropping and dropping due to offerings, dilutions etc.
and it’s not uncommon to see investors lose basically everything in penny stocks.
Of course, once a while there are penny stock companies on the OTC that have worked very
hard and showed impressive growth and finally met the requirements to make their stocks
available on the Nasdaq or the NYSE.
A perfect example of that is a marijuana stock called Aurora Cannabis, $ACB.
Their stock shares were listed on the OTC pink sheets as $ACBFF until october of 2018.
However, the chances of most penny stocks growing their business to be like Aurora Cannabis
is extremely low.
So instead of investing your hard earned money into penny stocks, I think the wiser long
term decisions would be to invest in established companies such as apple, facebook and disney.
Sure, you may not be able to own as many shares as if you were to buy penny stocks trading
at $1, but the long term percentage growth on established companies is undeniable.
And these investments are much safer as well.
There is definitely a lot of money to be made in penny stock day trading and swing trading.
That means you would just be buying and selling penny stocks intraday or within a short few
days instead of over the course of months years.
Day trading dng swing trading strategies are what I focus on a lot on this youtube channel.
Investing or trading any securities involves risk.
Before throwing your money into just any penny stocks, make sure to do your own research
and establish your own risk reward profile.
Always be skeptical of pr releases and do not follow others’ alerts.
This video is not a financial advise to buy or sell any stocks, but to inform you about
the potential risk involved with penny stocks as well as the upside if you learn to day
trade or swing trade them correctly.
If you are interested in more detailed day trading and swing trading strategies, feel
free to check out more videos listed in the description below.
If you’ve found any value or entertainment out of this video please drop me a like and
subscribe for more free content in the future.
Feel free to comment down below any questions you may have as well.
This is the humbled trader.
Thank you guys for watching and i will see you next time!