Penny stocks have nothing to do with business. Their stocks are traded on the so-called secondary market. Investors buy them to gain a high-flying stock’s investment returns, hoping that the higher return will be realised after the stock’s current volatility dies. Penny stock returns, however, can be spectacular. Some are marketed as being investment opportunities for single individuals who lack large financial resources. Such investments represent incredible potential for substantial losses when the underlying stock price of the “investment” is suddenly lower. Penny stock investors are advised to limit their exposure to as few as five to 10 stocks because their stock prices are driven by rumour, giving false signals because of the trading volume. Penny stock investors can lose everything when the real reasons behind the stock’s sudden decline are discovered.
Signs of manipulation
More often than not, the stocks published on internet stock websites are available for trading only for a limited time. On the other hand, Penny stock traders bid or offer prices for the stock within a few minutes in a high-volume, and usually paid-to-bid, manner, so that the market price can often double or even triple in a short time. In reality, there is only limited demand and little or no trading volume for such stocks. This means that their prices will remain stable or in some cases even decline over time. In some cases, however, traders buy a large number of stocks to manipulate the price. The buyers are the so-called pump-and-dump operators’ agents, who aim to profit from the trading volume. The agents buy the stocks at a discount or through a mix of cash and margin financing, which helps increase the stock price to the market. The stock supply is limited to the number of shares of the company available for trading on the regulated stock exchanges. Still, a non-operating company’s stock can be sold on the secondary market within a few minutes.
The stock of a non-operating company is often thinly traded and appears to be easy to manipulate. Therefore, to participate in the trading, pump-and-dump operators need to buy large amounts of the stocks and sell them quickly, by a predetermined plan. Such stock may be traded at a discounted price and, on the following day, the price might soar.
If the stock’s trading volume grows, the market manipulators’ agents can reap the price jump’s profit. The penny stock market in the US is wide open, but due to the regulated stock exchanges, there is a minimum set price for each stock to be listed on the market. If the speculators determine that a certain stock is cheap, they can buy or sell it for a profit, even if the price has already doubled or tripled. Even worse, after the stock’s trading volume has doubled or tripled, there is a risk of the stock price suddenly crashing shortly. The company with the share price fluctuations this much is almost a ticking time bomb.
Penny stocks can be a great investment if you know the way within. You have to trade carefully if you want the returns you desire. Track your transactions and keep in mind to update yourself daily with the happenings going in the market. It is an essential factor that you need to consider and follow regularly.
