If you are going to buy penny stock online, there are a few things you should know first.
1. Online manipulation of penny stock prices
The online world, including Internet forums and e-mail newsletters / spam, can really move the penny market. Because of the obscurity of most of these stocks, and the fact that they don’t have the same reporting regulations as bigger stocks, the penny stock market can be heavily manipulated or just plain moved by online rumors or spam e-mail sent out to bought or compiled lists of possible buyers or sellers. (Don’t get caught up in the “pump and dump” hype!)
2. Research your broker before you buy any penny stock
Everywhere you look nowadays, you’re hearing about financial fraud. Bernie Madoff, sketchy bank dealings, shoddy online brokers, etc.
Well, guess what? Penny stock brokers operate in a much darker world than those big players. There is less regulation in the Pink Sheets and OTCBB, because the government has an attitude of, “If you want to go play with the wolves, fine, but we’re not going to waste tax-payer dollars protecting your wild adventures.. Good luck.. Tax you on the other side!”
3. Research the **** out of any company before you buy penny stock online
I have talked about the lower regulation requirements on the OTCBB elsewhere, but it bears repeating. These companies do not have to meet such stringent legal requirements in order to trade on the penny bulletin board. That means that you have to do 5 times the work before you invest in these micro-caps.
This is an especially good are of investing to actually go to the factory or office and talk to the owners, the managers, salesmen, or their customers, as is suggested by the late-great stock-man Phillip Fisher in his Scuttlebutt method. Penny stocks are a wasteland, like the Old West. Few will probably emerge victorius, aside from the many insider scoundrels selling you the dream, or the ax-pick, if you get what I mean.
4. Invest with the same principles you would use investing in a large-cap stock
When buying penny stock online, through an online bulletin board like the OTCBB, do not abandon your principles. If anything, you should magnify your principles. Many penny stock investors, when they are first starting out, treat this market as if they were going fishing: “I’ll just cast my line out there and see if anything bites.. Afterall, all I have to lose is a few pennies!”
Ha! Whatever you have to lose in this sort of speculation is also what you have to gain. Money is no joke. It feeds the world, it waters the trees. Why would you want to throw even a penny away to some shady shark?
Go ahead and buy penny stock online, but be smarter than smart before doing so. There’s no doubt countless real, profitable companies behind many penny stocks but you must have a lot of confidence about what you’re buying before dipping your toes into these shark-infested waters. (Once they get your toe, they can pull the rest of your body underwater and eat you at their leisure – through such mechanisms as leverage or gamblers’ addiction.)
5. Nevertheless, buying penny stocks online can be profitable
Buying penny stocks online can certainly be profitable but it takes a certain special mind to wade through the murky waters. You will have to ignore a ton of information which is only a thinly veiled pump and dump scheme, where promoters drive up the price of the stock temporarily through hyping it to unaware amateur speculators, and then sell it short and cash in on the “stupid” public’s huge “penny” losses.
If you can become aware of these sorts of schemes populating the online penny stock market, then you may have a shot at making a profit. Follow the previous 4 tips in this post, and apply them and your specific principles of investment to any individual issue you take a fancy to, and then find an online broker who is not just out to game amateurs. It will take a lot more work to stay reliably up to date on the news that you need to know when to get in and out of your trade. And you may have to stomach a certain amount of illiquidity in the market, and maybe even more volatility than you are used to. This is why the only way to buy penny stock online is to apply the age-old principles of fundamental analysis on each individual company.