Before you become too excited about the hype involved with buying penny stocks, you need to understand why this hype persists: fraud. Long before the Internet, penny stocks were ripe with fraud and the Internet has only made the propagation of such fraud more widespread and persuasive.

Penny stocks are particularly susceptible to scams because they are traded on over-the-counter (OTC) exchanges like the OTCBB (Over-the-Counter Bulletin Board) and Pink Sheets. These exchanges do not exercise the same restrictions as the major exchanges like the NASDAQ and NYSE (New York Stock Exchange). Additionally, these quotation services do not require the share poster to provide as much detail on the stock, so you often do not have the same level of data as you’re provided by default on a major exchange.

Furthermore, the companies traded as penny stocks tend to be much newer and smaller entities. This means it is more difficult to find and validated substantial data on the corporate structure, history and road map forward.

There are a number of different scams oriented around exploiting inexperienced stock investors. These scammers prey on these new investors because they are easily fooled into thinking a stock called a “penny” stock somehow involves less risk. Unfortunately, it is just the opposite.

From the pump and dump to the chop stock, these scams have been refined for decades, and even though they have existed for a long time, they still work. So next time you see a ton of hype about making a lot of money fast with microcap stocks, you should really exercise a healthy amount of skepticism before you act.

You can still make a ton of money buying penny stocks if you know how to steer clear of all the scams. Learn the specific penny stock scams and how they work: visit Buying Penny Stocks.

Penny stocks are basic stocks that cost only $5.00 or less a share. In today’s world, it is nearly impossible to buy stocks for a penny, but having stocks that won’t be more than $5.00 a share is a good deal as well.
When purchasing penny stock, keep in mind this stock is offered by newer companies that are just starting out. These companies are looking for a way to raise capital.

Some may strike it big with the help of your money, while others may not do as well. If they do strike it big, you will reap the rewards.

When paying such a small amount as an initial investment, if the company goes up in worth you gain a higher percent than you would with other investments. When buying stock it is essential that you gain as much information as you can about a particular type of penny stock.

It is true that you can earn money quickly. On the other hand, it is possible to lose money fast as well. Because of this, it is always important to be informed when investing.

When buying, you should work with a broker who is familiar with stocks. You want to choose a broker that deals with penny stocks on a regular basis.

You want an experienced broker who will tell you the truth, not what they think you want to hear. One thing you should definitely be aware of is that penny stocks are distributed over the counter, not on the stock exchange.

This means that most brokers work on commissions based on transactions they assemble. Because of this, you should be careful about which brokers you choose to work with.

If you do not use a broker I suggest you at least subscribe to an online subscription service. With the aid of a broker or an online service you should be able to be a more informed investor.

When buying these stocks, your best choice will have to be choosing an online discount broker. This approach will likely save you money on commissions associated with traditional stockbrokers.

Online discount brokers can be beneficial because it pays to have a company that specializes in penny stocks to handle your trades. It gives you more focused expertise on your investments.

You will be required to deposit the money necessary to buy the stocks of your choice. Don’t worry as you can start with as little as a few hundred dollars in initial investment capital.

When choosing penny stocks, it is a good idea to have an investment plan. As always, spending more than you have budgeted is not a good idea.

When it comes to investment plans you should try to align them with your goals. To accomplish this alignment, choose penny stocks that fit your personal criteria for a good investment.

Before investing, become knowledgeable with the different companies that offer penny stocks. You want to invest your money with well run companies that understand the industry.

Before working with a company, you should feel that the company has a good chance of success. There are some things you can do to increase your chances of earning consistent profits.

Be sure to invest an amount of money that you can manage to lose without drastically and adversely affecting your investment portfolio. Keep in mind that investing in these stocks is considered to be one of the most speculative investments.

When investing in penny stocks, find a healthy balance of profit and the ever lurking possibility of losing money. You should always stick to your investment plan.

If it says that $100 in profits and $50 in losses, whichever comes first, each day is the limit. Once you reach the limit you walk away from the trading floor.

When you buy penny stocks, you must carefully think through your decisions before, during and after this activity to ensure that profits are maximized and losses are minimized. Lastly, you should never have more than 10% of your portfolio in penny stocks and do keep in mind that 70% of investors do lose money with penny stocks.

Penny stocks can be a good investment for many who want to invest a small amount of money.

About the Author:

Jack R. Landry has worked since the early 90s in the stock market as a broker selling stock. He has written hundreds of articles about penny stocks and investing.

Penny Stock Promoters - a sad truth with penny stocks is that many of them are promoted or “touted” by paid cheerleaders, whose only aim is to drive up the price of the shares.

Promoters may be “investor visibility” companies, who are paid either by cash or with shares in the company to drive up the price. They are very common, and generally operate online, especially since it was the widespread adoption of the Internet which makes most of their tactics, along with their anonymity, possible.

Generally this type of promotional firm will publish glowing research reports about the penny stocks, with very high price targets, and will distribute them to mailing lists and through free-access web sites. This is a major risk for investors in penny stocks, and the most likely way to lose money.

Founders of Penny Stock Companies – these are generally the entrepreneurs whose great idea or business has grown enough to justify the penny stock listing. They often know little about the workings of the markets and how penny stocks trade, and much of the time they could care less.

It is unfortunate that many of these founders of small companies get derailed, used, or trampled by the other types of people involved such as the scam artists or promoters.

Executives in Penny Stocks – Many times the original founder of a company will retain a leadership role in the operations of the corporation, once the shares are publicly traded. More often, however, the positions of CEO, CFO, CTO, etc, are swapped out with “experienced” executives, who may be hand-picked by the venture capitalists or investment bankers who funded much of the penny stocks’ growth.

The thing about some executives is that they believe paid-for promotion is a good way to increase the price of their shares. They may present at an investment conference, or buy coverage from one of these tout-sheets, and spend many thousands of dollars (or provide many millions of shares) in the process.

While the share price of these penny stocks may increase as a result, it is an artificial inflation, and as such is unsustainable. Prices will come back down.

Besides that fact, it is generally poor-quality companies that need to take the paid-promotion path anyway, and rarely the well-run, high-quality up and coming penny stocks.

Venture Capitalists – the money to take an idea, fund it, and grow the business usually comes from either investment bankers or venture capitalists. They may provide millions of dollars, or help the corporation raise the capital on the stock market by selling more shares of the penny stocks.

Of course, the investment comes with strings attached. Those that provide the money to these penny stocks may fill the board of directors with their own people, or place their choices into the key executive roles. This is not necessarily a bad thing, and has actually helped many penny stocks break out of the chains that their former management (often the original founder) had unwittingly built, which held the corporation down.

Scam Artists in Penny Stocks – Since penny stocks by their very nature are thinly traded, and can move dramatically in price, they make for the perfect vehicle for scam artists to manipulate. There are a lot of ways in which a scam can be perpetrated with these tiny shares, but it generally involves picking up a tremendous amount of shares cheap, then driving up the price while they sell into it.

A scam artist could be a 12 year old kid using his mom’s computer, or a well-known CEO who knowingly issues misleading press releases. Often, organized crime has been involved.

The best way to protect yourself from being the victim of a scam, is to only invest in penny stocks with solid fundamentals, like those profiled by well known analysts through subscription-based newsletters and websites.

Analysts of Penny Stocks – Professional analysts know what to look for in their investments, and those focused on penny stocks will generally provide you with much better prospects. These companies will have been professionally pre-screened, so you can rest a little easier knowing that the penny stocks will have legitimate operations and business models.

It is important that you look for those analysts of penny stocks that have a subscription cost, or else you would need to question their motivations for providing you with free penny stock picks.

By gaining an understanding of the various players in penny stocks, you’ll be better suited to avoid some of the pitfalls, while finding higher-quality investments for your portfolio. Just remember, there are a lot of hidden motivations in the low-priced stock world, and you don’t want to become a victim to them.

About the Author:

Peter Leeds reveals top Penny stock companies to subscribers of his newsletter. Learn more about Peter Leeds and penny stocks with his free online book.

• the direction of the economy
• the priorities of consumers
• the policies of governments (local / state / nation wide / international)
• peoples’ habits, beliefs, and activities
• the presidential office and the senate

That’s just to name a few. The ways in which the rules can and will change is vast and complex, and while you can sometimes predict trends, most of the shifts will catch us by surprise.

Sometimes, a trend takes decades (think changing from oil to solar). Sometimes it happens in an instant (think 9/11 and the instantaneously resulting military, political, financial, and consumer activity implications).

Now, if you go against a trend with your penny stock investments, it’s like swimming upstream. On the other hand, if you spot a trend early enough and react to it, you’re setting yourself up to benefit.

You wouldn’t want to buy into a fur coat company when it became politically incorrect to wear fur. The company’s customers, and therefore their revenues, would be dwindling down, and soon the penny stock shares may be as dead as the minks they skin. There would also be implications on all aspects of the fur industry, from the hunters all the way down to the advertising companies that had some furriers as big clients.

On the other hand, perhaps a drop in purchases of fur started resulting in an increase in purchases of leather coats, or expensive jewelry, or fine cars. People often bought fur coats because they were very expensive, and thus served as status symbols. Those same people, when they gave up on fur, would look to other forms of status symbols. Perhaps its a type of car, perhaps its a type of jewelry, or maybe it’s even a different kind of coat. If you can predict the result of the shifting trend, then there will usually be opportunities for you as a penny stock investor.

The are four primary trends which can impact your investment analysis, and the types of penny stock companies you may be investing in. They are:

• social
• political
• industrial
• consumer

In addition to these, there are many secondary trends which could be important, and should be considered by penny stock traders. Some of these include, but are not limited to:

• military (focus, spending, deployment regions)
• investor activity
• religious beliefs
• medical (treatments)
• medical (patient knowledge)
• technology adoption

A few trends of note in recent history include increased use of seatbelts, improving racial tolerance, the invention and widespread use of the internet, technology to combat crime (for example Lowjack to react to car theft), and so on. There are literally thousands of trends taking shape or underway right now, all around you. If you pay special attention to look for such shifts in society, you may spot a trend or two, and from that may position yourself to profit.

About the Author:

Get to know Peter Leeds, and read some recent articles by Peter Leeds.

At Leeds Penny Stock, we’ve found that the big 50% and 200% price climbs (and collapses for that matter) often happen in a matter of days or weeks, while the same stock may trade within a narrow range for months at a time, before and after the move.

This is especially true when a penny stock is reacting to significant news. Even the most volatile shares may have a trading range that varies 40% to 100% from high to low, but when that news breaks, the price of the shares also break out of the range and soar higher (or lower) within a matter of days… or hours!

To make the most of your money, you should try to anticipate the gains that these windows provide, rather than holding the shares over the longer term.

There are four ways that we’ve identified to increase your chances of holding shares just before they make their moves.

1. Technical Analysis Indicators for Penny Stock

As detailed in the section in Leeds Analysis on Technical Analysis, some trading patterns help you anticipate a break-out or strong upside price move. Penny stocks often bounce off of Support Levels, reverse their trends, explode out of Consolidation Patterns, or Bottom Out. Each of these technical analysis patterns can potentially identify an upcoming penny stock price move.

2. Type of Penny Stock Company

Different penny stocks are prone to different trading activity based on the industry or sector they’re involved in, or the type of business they operate.

For example, retail stores have a certain predictability of earnings and revenues which doesn’t allow for sudden explosions of price. Instead, they are more susceptible to longer, less dramatic price trends.

Meanwhile, a biotechnology company can see its share price suddenly double or cut in half based on news, rumors, or even rampant speculation. FDA approval? Law-suit from side-effects of their primary drug? Even small sparks can ignite (or kill) a biotech penny stock.

Other penny stocks that are subject to spiking higher include:

• research and development corporations

• companies with inventions that require patent approvals

• businesses that operate on a contract basis, where one major client or job could represent a significant portion of their total revenues (for example, defense industry suppliers often see their share price thrown around suddenly, based on government contracts won or lost)

• latest “in-the-media” hot stocks (some past examples of such industries include nanotech, dot com and internet, blue tooth, uranium mining, and any business poised to conquer the Chinese market)

• resource exploration companies (not producers)

Some examples of companies that aren’t necessarily subject to the same sudden price moves include:

• restaurants

• retail

• entertainment

• mining and resource producers (not exploration companies)

• furniture makers

Most companies, however, fall somewhere in between the examples given above. Such stocks are subject to price moves if the driving forces of their industries suddenly factor in. For example, a war in the Middle East will affect oil production stocks, or a company making clean energy technology suddenly benefits from a new government policy.

3. Volatility

Some stocks are naturally more volatile than others, for any of a number of reasons. You can get a feel for the propensity the shares have to move, simply by looking at a trading chart. What’s the difference between the year high price and year low price? How many times did the shares change direction, and how quickly did the price ramp up or fall off? How long did major price moves last?

There is a numerical indicator known as “beta,” which is simply a calculation of a stock’s volatility. You can see the beta for any stock on various financial sites, such as Yahoo Finance. A company with a beta of 1.0 will be no more or less volatile than the overall market. A beta of 3.0 means the company is three times more volatile, while 0.5 would mean that the company is half as volatile. Using beta, you can quickly see what to expect from the activity of the underlying shares.

To get the most out of these volatile penny stocks, try to accumulate at the bottom of the volatility as detailed in the section on Support Levels in Leeds Analysis. Then the price swings can become your friend, as they send shares higher, and quickly.

4. Anticipation

It is possible to predict the approximate time when most companies will release their financials (or you could just e-mail their public relations contact and ask). If you expect the details to surprise the street and you get involved before the release, you may be in for a good price ride.

If you can anticipate other types of releases, you may be able to benefit even further. For example, many biotechs will delineate their time line for product development, FDA applications, expected approvals, and product sales. Sometimes it’s just a matter of reviewing their previous annual report.

By having this information ahead of time, you could locate key buying opportunities just before the company has several upcoming landmark dates. If the price is right, load up on shares several weeks before they are expected to finish the development of their latest product. Certainly a news release can be anticipated, and in many cases it will probably affect the stock price, even when it doesn’t include any material changes or surprises from the company.

From another perspective, anticipating the biotech’s time line can help you develop exit opportunities if you are hoping to sell shares, and want to liquidate into a potential price pop to get a better profit.

The same concepts can be applied to stocks from different industries. Just be aware of the timelines, potential effect of releases, and expected results.

About the Author:

Peter Leeds is the Penny Stock Professional. Along with his team at Leeds Penny Stocks they publish picks, buy and sell prices, daily updates, and special feature reports.