Be careful of penny stock promotors. Day trading can be a very lucrative endeavor. Or it can be your worst nightmare come true. The quickest way to realize your worst nightmare is to follow someone who promises you thousands of dollars a day by following their lead. I’m not going to name names. You know who the penny stock promoters are.
Perhaps you’ve seen one of their ads, twitter posts or even worse, been a member of their chatroom. Shout outs like “I’m long XYZ” or “XYZ is going to pop,” are the all too common style of these so-called gurus. They wind up being little more than scams and represent businesses ultimately poised for failure.
I thought I’d take the time today to tell you everything that you need to know about penny stock promoters; the good, the bad and the ugly.
- There are many different opinions on what these penny stock promoters do. And the types of companies that they ultimately represent. The verdict is still out. In theory, their goal is to promote companies that are lesser-known, relatively new to their markets, or otherwise undervalued. Through their promotions, they’re able to generate interest in such a way that stock prices become artificially inflated.
From the traders perspective, this can be a prime opportunity to secure stocks at classically low prices, right before a sharp rise. Then an almost inevitable decline.
Due to their cheap prices and their rapid profits (sometimes causing trading halts), some savvy investors target this section of the market for quick buy and sell transactions.
The Dangers of Artificially Inflating Stock Prices
On the flip side, some companies use these penny stock promoters services specifically for generating the artificial run-up in prices. Thus allowing them to dump internal shares at higher prices.
By driving prices up, they can sell fewer internal shares to reach their funding goals. Promoters are paid in cash and can earn anywhere from five to seven figures for their role in these transactions, ultimately depending upon what they can help businesses achieve.
One thing we all need to be aware of is the “pump and dump” scheme. Newsflash for those new to the trading world, the “pump and dump” is illegal.
One sign is when promoters give out hot tips on stocks that they intend to buy and sell themselves, once the stock seems to reach its peak. Do your research!
While promoters win in this scenario, most retail traders like you and I won’t have the insight to exit the trade in a timely fashion. Instead, we will be left with shares that have rapid declining or even outright plummeting values.
In other words, a situation we do NOT want to be in. Unfortunately, those who are proficient in pulling off-pump and dump schemes often leave the table with millions, while new traders exit with significant losses.
Penny Stock Promoters and Market Manipulation
What I mentioned above penny stock promoters do an intentional manipulation of markets. By sending out exaggerated statements of projected, future success, these individuals can incite significant reactions from market players.
People get excited. Especially newbies and they want to jump in on the moving prices. God forbid they miss out on the move, and they make a trade decision in haste.
And it’s these emotions and hasty trade decisions that ultimately create the penny stock promoters profits. Do try FOMO trading at home!
Now, I don’t want to sound completely cynical. The truth of the matter is that there are people out there who want to help others find low-cost investment opportunities that have high-profit potential.
The returns for doing such a job never quite hit the seven-figure mark. Thus, genuine and trustworthy promoters are sometimes few and far between.
How to Identify the Pump and Dump Scheme
- You should also note that there are at least three foolproof ways of identifying a pump and dump scheme. And the professional who is likely to implement them. Foremost among these is the promise of significant profits. If your purchase price is low, you shouldn’t be able to exit the deal as a millionaire within a nominal amount of time. Opportunities like this aren’t unheard of, but they are incredibly, incredibly rare. If it sounds too good to be true, it most likely is.
Be especially suspicious of penny stock promoters that tell you that you must act now. Spending time studying companies will allow you to make informed decisions about their profit potential on your own.
Companies that have a future don’t require you to make instant decisions. You always have plenty of time to do the necessary footwork.
Reverse mergers are another thing to look out for. When penny stocks undergo reverse takeovers, a pump typically occurs at some point in time.
Furthermore, this is a strategy that allows privately traded companies to trade publicly. In these instances, know that companies and their promoters have underlying motives.
What’s more, the timing of these transactions is not made by considering the best interests of retail traders. Finally, be wary of penny stocks known as flatliners.
If their profits have flatlined or remained static at a specific level, these stocks should not experience a sudden increase that’s in direct relation to the period of the promotion.
Be warned, this is evidence of market manipulation and purposeful, artificial inflation of prices.
You Have a Responsibility as Well
Those new to trading will invariably hear the same pieces of advice over and over again. There is profit potential in penny stocks.
But you have to do a lot of the work on your own. Whenever you are entering any high-risk market, you have to compile a lengthy list of reputable information sources.
The more adept that you become in doing behind the scenes research, the easier it will be to identify the best opportunities. Moreover, this list cannot include actual promoters.
The main thing to keep in mind is that very few of these professionals are always operating with the best interests of retail traders in mind. That’s why you always have to be mindful of your own best interests. Penny stock promoters and his or her words and evidence should never be the sole basis of any trading decision.
At Bullish Bears, we are vehemently against calling out trades. We refuse to promote or shout out stocks in our trade rooms because we want to teach you how to identify your own trading opportunities. Join us today, and we will show you how!