5 Dangers of penny stocks
Here we will talk about the 5 dangers of penny stocks.
Penny stocks are usually illiquid securities with small market caps. The small market cap makes the stock very easy to move, and leers investors in based on the very low security price. Now lets get into why they are dangerous.
5. Dilution
Dilution on a stock means the company is dumping unrestricted shares into the open market in order to raise funds or for their own enrichment. Dilution is usually seen as a negative however this can create great buying opportunities when timed right. However, you don’t want to be in a stock if they are dumping 100s of millions or even billions of shares.
4. Social media “Hype”
I have noticed when stocks are being hyped on social media on sites like Twitter, Facebook and stock forums the stock tends to drop significantly in price. Share owners will tout their stock trying to inflate the stock price in order to drive the stock price up and then dump their shares. Sometimes the hype will continue for several days, or even weeks where the stock will rise, however the larger the move the harder the fall.
3. Pump and dumps
Pump and dumps happen a lot on low float stocks, these are stocks with small share structures where one person or a group of traders own a majority of the shares at a very low price or what we will call (bottom). The owners of the stock will then tout the stock saying, “ it’s the next Tesla.” “This stock is the biggest penny stock of the decade.” This brings in naïve buyers which creates volume for the majority share holders to dump into.
2. Front loading
Front loading is when traders buy a stock before announcements for example a press release. You will notice a spike in volume before any announcements are made by the company and then “news” hits the open market where the front loaders dump into the news. (This is very common and a must look out for if you want to protect your investment)
- Stocks that are Delinquent on Filings
When a stock is delinquent it means they haven’t filed to OTCM (Over the counter markets) on time, this can be months, years or sometimes even longer. The best practice is to avoid stocks that are delinquent because they risk being suspended by the SEC. a great example of this are stocks like Arcs. I’ll post the stock chart below to show you a classic pump and dump.
You want to avoid these at all costs. Though the stock rose 4,000% the stock dropped just as fast and it’s very easy to get trapped and caught holding a bag.
It’s best to do your own research and due diligence on stocks, because there is a lot of deception and lies. Not all penny stocks are bad, but you definitely have to be careful out there.
