Tons of traders are drawn towards penny stocks because they are traded at a low price, usually less than $1. These stocks can be found in OTC markets and regular stock exchanges.
Thanks to their low prices, it might be hard for retail investors and traders to ignore penny stocks, especially rookies. But, more often than not, there are inherent risks in trading penny stocks, which you must thoroughly analyze.
Some penny stocks might be a good option for traders because they might be devalued for specific reasons. With algorithmic stock trading, traders can see if these stocks show an uptrend in the prices.
In contrast, some penny stocks might not have the potential of price recovery and can end up being a money pit for investors.
So how do you know which options you need to put your energy towards for maximum profits? Well, it would help if you understood the price potential of penny stocks before investing in them.
Additionally, you must realize the importance of identifying penny stock scammers trying to swindle you out of your money.
Beware Of These Pump-And-Dump Schemes
The risk of penny stock scammers is high as they lure inexperienced investors for opting in stocks of worthless companies, creating spikes in stock prices.
Once the stock price goes up, scammers sell their stocks to earn profits, keeping investor investments at high price levels. These scams are called pump-and-dump schemes.
Publishers and writers often get paid for promoting wrong information about the penny stocks. To safeguard yourself, you must read the fine print on the promoter’s website.
When the share price is the only factor considered for penny stocks, you should check the number of shares available in the market. Apart from this, it pays to be aware of some penny stock scams before investing.
We have selected 5 pump-and-dump schemes to watch out for when trading in penny stocks and give you some basic information about each one. Let’s get straight into it.
1. Dilution Of Shares
Sometimes, the outstanding number of shares gets diluted due to the factors like share issuance for capital raising, employee stock options, stock splits, etc.
This dilution of shareholdings can impact the number of shares held by other investors, affecting the stocks’ price fluctuations.
2. Short-And-Distort Scams
In short-and-distort scams, scammers short the shares and take advantage of the downward trend in prices.
In this case, scammers borrow the shares from the broker and make short trades with these shares. When the share price falls, scammers purchase the shock at a lower cost to earn profit and refund the broker’s pledged shares.
Scammers spread false news and rumors about the penny stocks and take advantage of the situation for dropping the price. Real investors lose the stock.
3. Reverse Merger Deceptions
When the merger of a private company and a public company happens, a private company’s penny stocks are traded publicly without any traditional listing procedures.
A private company having penny stocks can quickly inflate its earnings and stock prices.
You can spot some reverse mergers that are legitimate, understand its business history, and invest in such stocks while the company is in the merger process.
4. The Guru Scam
Guru scammers often have a significant advertising budget. Usually, they offer investors to share their secret of making huge profits with penny stocks for a one-time small fee.
Although these scammers seem respectable, you need to stop and think before falling prey to such offers. Do your due diligence and pick only credible trading options; else, you risk losing your money.
5. No Net Sales Scams
Scammers tell the investors to hold the shares for a certain period due to massive demand for their stocks. Till the time of the locking period, investors lose almost their money.
6. Offshore Rackets
There is no need to register shares in the US for the company operating outside the US and selling shares to US investors. Scammers take advantage of this situation.
They purchased stocks of unregistered and cheap foreign company shares and sold them to investors at a high rate. This activity results in a dropping in the price of unlisted shares, and investors lose their money.
How To Avoid Scams
The number one way to avoid penny stock scams is to acknowledge the reality of the trading world:
No one in the world can assure you of earning profits with penny stock investing, nor can they guide you on a penny stock’s performance in every situation.
With this thumb rule in mind, you can now employ a few investment strategies to make profits in penny stocks.
Use free stock api for tracking and finding hot penny stocks. These APIs keep an eye on the 200-day Simple Moving Average (SMA) and identify the penny stocks’ potential to trade in the long run.
With technical charts, you can search for penny stocks with the most precise technical pattern and use your technical analysis skills to identify them.
Plus, these patterns are hugely important in deciding the stop-loss point to restrict penny stock trading losses.
These technical patterns also give you a broad insight into the exact entry and exit points and can limit the chances of loss to a certain extent. Essentially, they showcase the risk points in penny stock trading.
Rather than determining these points on your own, you can enlist the help of algorithmic trading to quickly strike the trade at the perfect point in time.
From share dilutions to guru scammers, the list of pump-and-dump schemes goes on. However, once you are aware of the risks and ways to offset them, there’s no reason not to trade in penny stocks.
The penny stock market moves irrespective of the overall market performance, giving traders the chance to earn profits with well-diversified portfolios.
Many speculators deal in penny stocks, but you can only earn profits with the right techniques, appropriate research, preparation, and unbiased scrutiny of stocks to be traded.
In conclusion, you can increase the chances of success in penny stock trading with the perfect blend of research, automated tools, and an understanding of technical charts.