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Penny Stocks – Beyond the Pump and Dump

Penny Stocks can be a great investment, but you have to know what to look for, or sometimes more accurately, what to look out for. Buying Penny Stocks based on a recent email you received, or what you heard from someone you barely know, is not usually a good idea. Penny Stocks have historically been a source of wealth for many investors, but conversely have been the source of countless lost small fortunes. Determining what is good advice, mixed with all the hype, can sometimes be a very difficult process. You don't have to be a stock market guru or brilliant investor to make a killing with Penny Stocks, but you do have to be willing to do your homework, and use a great deal of common sense to stay alive when you are swimming with the sharks in what can be dangerous waters.

There are many great small companies in existence today, struggling to stay afloat, that are tomorrow's rising stars. Without the capital to grow and expand very few of our current generation of conglomerates would be more than a forgotten flash in the pan. Selling shares of a company can inject the needed capital into a niche business that may take it into the next level. However not all, if not most, of these tiny corporations will be around for very long. This creates an interesting situation for us, the investor or speculator. While the company in question may not be worth much today, what might that company be worth tomorrow? Hence the term speculation, which is the lifeblood of any Penny Stock trader.

Unfortunately, within this world there are a few unseemly characters, who seek to part you from your hard earned dollars. And, they will go to nearly whatever means is necessary to achieve their goal. PR firms, or Investor Awareness firms, are sometime hired to promote a small corporation's stock in hopes of raising the share price. This in itself is not necessarily a sign of ill intent. Many times a small company may be very good at what it does, but for whatever reason finds itself unable to generate enough press interest in their successes to generate buying activity of their stock shares. However, this is occasionally done with the sole purpose of raising prices rapidly in an attempt to make quick profits on a very hollow company, one that has no real market or solid foundation. Hence the phrase, pump and dump. Pump and dump in a nutshell means, exaggeratedly "pumping" up the company in question with the primary intent of "dumping" their shares once the share prices begin to rise.

What can you do to protect yourself from being caught up in a pump and dump scenario? Most importantly you must use your own due diligence to wade through the hype. Ask yourself a few basic questions about the company in question. Are they making money? Are they creating new products? Are these new products going to be valuable in the future? The rules for trading Penny Stocks aren't much different from those of trading large cap stocks. However, the risks can be much larger, but the rewards can be as well.

If you aren't willing to do at least a bit of homework, investing in any stock is not a good idea. Never rely entirely on anyone's advice, especially when dealing with Penny Stocks. But, if you take the time to research your investments, investing in Penny Stocks can be a very financially rewarding experience.

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10 comments:

  1. Investing in any stock isn't something one can just dive into..one can not rely on people"s advice.. One needs to do his homework..one needs to ask questions about the company in question.Before I trade, now i know things I should look out for..thanks a bunch

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  2. There was a guy who lived next door. There was this time he started trading because he heard his friend had made it big in the sector. The guy did lose very much. It's not always advisable to take advice from what you hear from random people.

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  3. As a rule of thumb it's best to always do your own research even if you are sent tips by someone else. The market can be way too volatile sometimes.

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  4. When going into stocks one must be ready to do the dirty work and verify whatever he/she is told at every step. It's not a profession for the lazy!

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  5. I know I really about about stock and penny stock and as you have indicated I believe it will do us especially the beginners a whole world of good to do our personal research before investing in it.

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  6. It's interesting that you have to feel around any use your instincts before choosing a company to invest with. Research too is a big game changer for penny stocks. I'm sure you can make smarter calls and be more intuitive with more experience while gradually growing your investments.

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  7. This is why I say stocks are more than just numbers. With that said, I am not that good yet so I leave this up to the experts.

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  8. You have to use common sense and a lot of research to survive in this dangerous waters, when you are trading with penny stock. Otherwise your loss will be someone's fortune.

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  9. I have a friend in the office who plays with stock. She's been egging me on to let her act as a stockbroker. Maybe I will one of these days but you're correct, homework and research is a must if I want to venture into this.

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  10. In this dangerous waters, you need to know what to look out for. Otherwise you will be lost in the middle.

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