Beware the Professional Penny Stock Broker
These days there is really no rationale for hiring a professional full service stock broker to buy penny stocks on your behalf. Once you retain a typical stock broker to manage penny stocks for you, you are buying into exorbitant commission charges, often incompetent business services, and at worst, occasional scam artists.
Obtaining reliable investment information on the penny stock market is extremely difficult because of the scarcity of dependable corporate data in the treacherous world of the OTC and pink sheets. By the time a professional stockbroker were able to pass along important news about a penny stock, it would probably be too late to capitalize on it. Generally speaking, if the broker is strongly promoting a specific penny stock issue, he stands to benefit financially under the table, one way or another. The responsibilities of a stock broker do not mesh with the qualities of a good financial advisor. The broker is compensated for the amount of dollar volume he generates via stock sales. He is interested in generating high commission sales, not providing quality financial planning advice. He is naturally going to be interested in generating the quick buck via high commission sales, not working towards establishing a long term client relationship. On top of that, you end up paying triple the charges for receiving poor investment advice.
Stay clear of these charlatans and hook up with a reputable online penny stock broker. Generally speaking, you will not be communicating with anyone from the brokerage, unless there is an administrative question regarding an order. You will not be pestered by any salesmen looking to make a quick buck, leaving you free to perform independent investment analysis and place orders at your own discretion. You will be able to focus on the data that actually causes stock movements, such as the real time price of the issues and the commonly used pertinent mathematical ratios.
If discussing your finances with a professional is important to your peace of mind, then seek out a financial planner who charges a fixed fee for his services, and who does not have a vested interest in the actual stock transactions. The wave of the future for penny stock investing is strictly through the internet.
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Penny Stock Investment
Any stock that is not traded on the big three stock exchanges of the NYSE, NASDAQ, and AMEX, is considered to be a penny stock in the United States, although technically the SEC considers any stock trading under five dollars a share to be a penny stock. New investors are attracted to penny stocks due to their low price, and their appeal for potential fast and massive gains. However, such investments are very volatile often gaining or losing large percentages in just a few days.
Acquiring reliable knowledge about companies is the secret to investing. Unfortunately, information about penny stocks is hard to find and this is one reason they are so risky. Companies that are listed as penny stocks are either newly formed and have no history, or do have a history with a poor track record. Another reason they are so risky is because they are not regulated.
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At most, all a penny stock company has to do is to make sure that they file with the SEC on time. In other cases, companies are not required to file with the SEC at all and thus remain unregulated. In fact, this may be the reason the company has become a penny stock, because it was listed on one of the big three exchanges, but failed to uphold its reporting requirements to the SEC.
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In addition, a lot of the information that is available about these companies is not credible. People often think that large companies started off as penny stocks, but this is always not the case. What they are mistakenly looking it is the adjusted stock price. The adjusted stock price does not take into consideration any splits the company has. What happens here, is that people assume the stock started out as a few pennies and worked its say up into the $100 range it is now.
However, what usually happens is that the stock starts out at $20, gradually works its way up in price and splits many times in its history. The biggest risk with penny stocks is that they are used by a lot of fraudsters. Due to a lack of regulation and oversight, these stocks are used by fraudsters for “pump and dump” schemes. The fraudsters buy into the company and then promote it.
Once people start buying in, the fraudsters cash out all their stock and make a nice profit, leaving everyone else holding the bag. Ways of promotion include sending spam mail and paying off figureheads on television and radio to promote their stock. Always make sure to never to buy stocks based on spam. You should also check to see if the media contact owns the stock or is being paid by the company that they are promoting.
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Are You Buying Penny Stocks Of Big Companies?
With today’s economic turmoil, some of the big companies are starting to look like penny stocks. In the last few months we are seeing some of the big boys losing so much value that their price per share has dropped below $5. What does that mean for you in regards to buying penny stocks, trading and making some big gains?
In the auto industry we now see General Motors (NYSE:GM) and Ford (NYSE:F) trading in the $3 range. GM hasn’t seen these levels since 1943. In January 1999 they were trading at $87 per share and in the beginning of this year (2008) they were at $19. Now eleven months later they are on the verge of bankruptcy and trading at just $3 per share.
Ford is in the simular situation, they were at their all time high of $37 per share in March 1998 and are now trading at less than $2 per share.
Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) the two government sponsored mortgage brokers have also lost 98% of their valus since the beginning of this year.
American International Group (NYSE:AIG) were just saved by the government after losing 97% of their value.
For all intent and purpose, these stocks can now be classified as penny stocks. Many traders, especially the newbies and amateurs trade penny stocks for a couple of reasons. One, the price per share is cheap and two, penny stocks typically have the tendency to jump big when refer to as percentage gainers.
Do you really want to start trading these companies that I’ve listed? The answer should be no, but I’m sure quite a few of you guys and gals out there are already do so. I will tell you that these companies as well as their stocks are broken. They are all leading companies that help build this country, but because of bad business practices are now in big trouble of going away for good.
So if you want to trade these penny stocks, go right ahead, but don’t say I didn’t warn you.
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