Wednesday, December 17, 2008

Need To Make $$$ Fast? Beware Stock Promoters

With the economy worsening and people seeing the value of their homes, pensions and investments heading south, many will undoubtedly be looking for ways to make a quick buck. Some may start buying lottery tickets, others might decide to frequent casinos, and no doubt a few will be lured into trading stocks.

There is no shortage of resources available to current and prospective traders, but I would caution anyone considering a foray into the world of buying and selling stocks to exercise extreme caution. The internet is plagued with promoters who will use almost any means necessary to lure investors into stocks of dubious value.

For the novice investor the first thing that must be realized is that a market involves two things, buying and selling. We’ve all listened to a business report and heard something along the lines of: “A wave of buying moved stocks higher today”. But obviously if there was buying going on there had to be an equal amount of selling. The question must be asked: Who was making the smart play? Was it the buyers or the sellers?

If you look around for newsletters, stock groups, or other on-line sources of stock trading info, then chances are you’ll be dealing with many of those sellers. The game is stock promotion and when individual investors-traders are buying, its often industry players who are doing the selling. All too often the stocks being talked about and promoted the most, they’re the one’s of least value. For those looking for big percentage gainers it will be hard to avoid the penny stock market. That doesn’t necessarily mean stocks trading for less than one dollar, typically it refers to any stock trading under $5.00. Usually that means stocks trading on the OTC (Over The Counter) or Pink Sheet exchanges but also sometimes on the Nasdaq or Amex.

Using sites like Yahoo finance or you should be able to get a quick snapshot of a company’s financial situation. And what you’ll find with the vast majority of penny stocks is that they’re losing money now and have been for a very long time. So how do they continue to operate you might ask? By printing and selling stock certificates and selling them into the market.

You might come across a company that is touting itself as having the nextest and bestest technology for say…converting garbage into something of value. If this company is looking to dump a bunch of shares into the market as a means of raising cash they’ll often hire a stock promoter. Stock message boards will suddenly be clogged by posters touting this great new play, newsletters will inundate inboxes, glowing press releases will come out. Its not unusual to see a stock mired at few pennies per share suddenly jump 500% or more in as little as one trading day on incredible volume, sometimes hundreds of millions of shares.

Where do these companies get the money to hire the promoters? By paying them in stock. If a stock is trading OTC or on the Nasdaq or Amex exchanges I would suggest a look at their SEC filings for two things, the number of shares issued and the number of shares authorized. What you’ll find is that many companies will have perhaps 100 million shares issued and outstanding, and authorization to issue tons more. With promoters being paid in stock they have extra incentive to do all they can to spur buying and push the price as high as possible.

Step by step this is how a penny stock promotion typically goes:

The Lead Up
During this time “bashers” will appear on message boards and do everything they can to convince holders that the stock should be sold. The industry players want to lock up as much of the float as possible because when the eventual promotion comes they don’t want to be competing with “Joe Trader” who decides to dump his shares into a run. After all there are only so many buyers that promoters can attract and they’re the ones who want to be doing the selling.

The Promotion
Emails and other promotional vehicles are used to hype the stock, volume picks up as investor sites and message board ‘pumpers’ appear. Often there’s some positive movement in the price.

The Spike
Although a glowing press release doesn’t always come out, it is fairly common. Lots of nervous traders have the stock on a watch list due to all they hype, but haven’t bought yet. Now they see the volume and price moving fast, so they rush in.

The Pull Back
There are many traders out there who are willing to take any profit, but before they can hit the sell button the PPS drops and they’re below their break-even point.

Sucker Rally
Volume and price start moving up again, and this time there’s usually a PR out. Some traders who made money on the initial spike will be lured back in, only to be trapped.

Down Down Down
With the promotion over the stock trends in an overall downward direction. Some traders will look to average down thinking another spike is inevitable.

Rinse and Repeat
With penny stocks many times you’ll see a reverse split, sometimes as much as 1 new share for every 100 shares. Someone who’d bought 10,000 shares at say $1.00 per, and watched the price plummet to .25 now has 100 shares worth $25 each. A $10,000 ‘investment’ has gone down to $2,500. Later, when the company decides to promote its stock again, the articles of incorporation will be changed to authorize more shares. Its not unusual to see a company change it’s name, and ticker symbol.

Extra Note – Read Those PRs Carefully
For those not skilled in the fine art of hyperbole, (meaningless words made to sound meaningful) I strongly suggest being as cynical as possible when publicly traded companies issue news. Many will look something like this:

CEO Mr. Sleeze announced the introduction of ‘Some Product’ to the marketplace and had this to say: “We at ‘Some Company’ are very excited about this launch, we’re anticipating significant growth this year and are expecting to see a measurable impact on our bottom line”.

How much growth is significant??? How much money equals ‘measurable’? Even a 1 cent increase can be measured. These are called ‘forward looking statements’ and as such do not constitute misrepresentation of fact.

It’s a mug’s game in my (not always so) humble opinion…and PT Barnum was absolutely right, suckers continue to be born every minute. This is a game I learned via the school of hard knocks, and while I was able to make some decent $ on occasion, on the whole it was a losing proposition. I investigated tons of information and learned the game as well as I could, but in the final analysis I realized the board is tilted against the individual trader.

Reading this you may think: “Okay, I’ll get in when things are quiet and dump when the spike comes”. If that’s the case, I will wish you luck but I still think you’ll end up losing in the long run. The risks are very high and the rewards in my opinion aren’t worth it. In fact if you’re looking for a good risk versus reward play I’d suggest lottery tickets. Someone thinking they might be able to make $10,000 on a penny stock, anticipating a spike of 1,000% or more would need to risk about $1,000. A lottery ticket can be had for $1 or $2 with the potential to return millions. Sure the odds might be astronomical, but compared to the reward it’s a far better play than penny stocks…better to lose one or two bucks in this economy than thousands.

***If you're still determined to try playing penny stocks READ THIS FIRST for some tips***

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