Two truths stand out about penny stocks. One, the penny stock market is full of sleazy promotions, overblown companies, and outright fraud. Two, it offers the only stock game I know if where you can find all the blazing excitement of a firefight with only a few bucks in hand, where it is at least theoretically possible, if highly unlikely that you can turn a few thousand into many times more.
It is probably impossible to catalog all the hazards of penny stock trading (you can never call it investing). The game is rigged to take money from the market and funnel it into the pockets of the promoters. Information is almost always overblown and sometimes downright fraudulent. Promotion trumps substance. The insiders reverse split the stock to squeeze out the little guy, issue themselves a ton of cheap stock, and then promote the price so they can dump it. Financial statements are sometimes wrong, created by amateurs, and in the Pink Sheets they are unaudited. The insiders can pay themselves excessive salaries, sometimes in stock that dilutes the stock held by the investor. Convertible notes, so-called "aged debt" is used to harvest money from the market.
Further, as a matter of social benefit, not that much of the loot falls into the company's bank account. Most of it goes rather to the promoters, whether they be the majority holders or some outsiders playing the stock.
Some managers do serial stock promotions, entering a fad business, and after that fails, entering another fad business, ad infinitum. They never really intend to succeed.
Let's face it, the penny stock market is a con man's paradise.
Why allow it? I believe that to squash the penny stock market would be to crush even more the entrepreneur, the legitimate little guy trying to get finance. The issue is how to get rid of the scam artist without harming the real people there.
I believe that the penny stock market, the small cap or micro cap market will be even more important in the future as providing an exit strategy for investors who went into crowdfunding deals. For them, the exit is will almost always be public market or selling the venture. In selling the venture, they will get cash or public stock most often.
From the point of view of the investor, the roller coaster ride of penny stocks continues to be a real testing ground for new investors -- kind of like the ten cent crap table in Las Vegas. You know as a beginner you are going to pay to learn the game. It is also a real macho endeavor, where you can test your skill and your nerve.
I am going to let you in on the guts of the game so you can better protect yourself and hopefully make some profit.
As always, never invest more than you can afford to lose, because it is likely that you will lose it. Very high risk territory only for those with the nerve and smarts to survive the battle there.
For openers, you might want to check out my books, "How to Pick Hot Reverse Merger Penny Stocks," and "How to Pick a Home Run Stock," on Amazon.
When you get scammed, you might want to contact me and see if you can sue the bastards, john.lux@securities-law.info
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