8 Penny Stocks to Avoid
There are thousands of penny stocks out there to invest in. Some can turn a small amount of money into a nice profit very quickly. Penny stocks can be risky, but the reward is high when you know what to invest in and what penny stocks to stay clear of. The first thing you want to do is look at a top 100 list of penny stocks to see which ones are doing well and have been doing well for some time. Make sure you evaluate them by look at their charting history, volume and latest news. Are they a solid company that are there for the long haul, or are they here today and gone tomorrow? Do your research, and pay attention to the following situations.
The Salesman: Avoid anyone that actively seeks out to you to tell you about a great opportunity or investment whether it’s in person or over the phone. They have great talking points and arguments that make sense, but they are working for their gain not yours. They are pressured to make the sale because they will make a commission or profit from the investment. They are doing their best to dump the penny stock on you, and the investment you pay in will wind up in their hands or the hands of their company. Once you have the stock, you may have difficulty finding a buyer if you decide to sell when you see the stock drop. This means that even if you try to get out, you will lose even more.
Remember, strong solid companies that are growing don’t need to pump and dump, but those companies that are struggling or have sketchy business practices are reaching out to grab onto whatever they can. If you aren’t paying attention or ignore this all together, they’ll get you and it will be what you deserve.
Low Trading Volume: When trading volume on a penny stock is very low, it can be difficult to buy or sell for the prices you want. Also, you can’t tell where the penny stock price is going. It could be up or down in an instance. There isn’t enough volume to see a trend or a steady increase or decline. You won’t be able to accurately determine fair valuations for the companies share price. Well, the bottom line is that companies with low trading volume typically are trading lower for a reason. They are not attractive or have enough interest. This could be due to negative press, product set backs, little history, bad management, etc.
There are many companies and professionals that are hired to specifically pump and promote a penny stock. They put out alerts or generate rumors that some penny stock is about to make it big. This rumor and energy gets spread through chats, co-workers, friends, family, etc.
If you fall into a promotional pump without understanding this factor, you can lose a lot of money. Most of the time if a penny stock really is about to spike, you won’t hear much about it because the investor wants to keep it quiet.
Now, there is one exception to this. If you are aware that these promotional ploys are out there and you are willing to take a big risk, you can get in early, right before or at the time of the pump and sell before they dump. I warn you though because this dump can happen within minutes. You could be up $1.50 one moment and down $1 the next. However, if you are lucky and do time it right and really watch the stock in real time, you can make a pretty penny.
Guaranteed Performance: If it sounds too good to be true, it probably is. Don’t ever listen to anyone or any company alert if they guarantee your best penny stock to go up. These people very well may be a promoter, self-serving broker, or a naïve investor that heard a rumor or alert from someone or somewhere else. There are no guarantees and it will probably go down. Don’t believe anything unless you have done your due diligence. Evaluate company history, historic quotes and charts, news, or even call the company and ask about upcoming product releases or company direction. Just don’t move forward without your own proper research.
Sinking Stocks: Specifically with penny stocks, don’t bank on the idea that once a share price has dropped a lot, that you should buy it because it will bounce back up. You may think that it is a good deal and it can’t get any lower, but you are wrong. They many never rebound and continue to sink. You don’t want to get caught up in that. Again, do your research.
No Commissions: While commission free may sound enticing because you think you are saving some money, think again because this typically means that you are buying over the counter stock directly from the company or promoter. They will make their own invisible commission off you by selling to you for a random price which could be very high, or they could sell to you at the asking price rather than bid price based on their their own valuations.
International: So if you think that you may find a hidden treasure outside of the US or North America, I would strongly discourage you. The best ones truly come from here, but lets take a closer look. Any penny stock from Russia, Europe, Africa, South America, etc are challenging because the investor protection is not great and the broker fees you will incur when you purchase internationally are high. It’s not worth it.
Warrants and Rights: They are not technically stocks, but they look like penny stocks and may be listed in the stock pages or lists. They get traded for even less. They are derivative investments on an underlying company’s shares. You probably won’t accidentally purchase one, but make sure you have an understanding of what you are reading and buying. Then, make sure to verify the purchase with your broker.
If you apply these guidelines toward your best list of penny stocks, you often times are ahead of many naive traders. Do your research!