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07/31/2018 |

Penny Stock Alerts: A Cautious Look

If you’re a trader with an email address, especially if you have signed up to any alert mailing lists, you have likely seen endless services advertising penny stock alerts. They all make claims of amazing profits and minimal risks, but is penny stock trading really the holy grail you have been looking for? Well, penny stocks are not a holy grail, but they can provide many great lessons on how to deal with greed and a consistent system of taking profits and minimizing losses. The first thing to learn before anything though is the fact that there are many penny stock alert scams around and you really need to be careful when looking for a way into this kind of trading. The question is, how can you tell if penny stock alerts are real or just another scam? We are going to show you how to avoid the scams and make the most of the penny stock opportunity.

What is a Penny Stock?

Before we start talking about finding the best penny stock alerts and how to spot the scams, it’s a good idea to be clear about what a penny stock actually is. As the name suggests, they are low-priced, low market capitalization stocks, with the SEC (Securities and Exchange Commission) defining them as those that trade below $5 per share. It used to be below $1, which is where the term comes from. However, it is important to realize market capitalization is almost just as important. Market capitalization is simply the size of the company based on the current market price multiplied by the number of shares available to the public. Sometimes these can be referred to as “micro-cap stocks”.

Example of a penny stock crash.
Example of a penny stock: $HMNY, the parent company of MoviePass, stock chart as of July 31, 2018.

While on the surface, the low stock price makes for an attractive option, it should be noted that they are also extremely volatile. Of course, the sharp moves in either direction are part of the attraction; potentially turning a small investment into a large sum in a relatively short period of time or blowing up an account in one trade. As always in the market, volatility does mean risk, and it is important to remember that this volatility doesn’t always make sense and can change very quickly based on the flow of trades in and out of a generally illiquid security.

Penny Stock Alerts: The Marketing Scheme

Have you ever wondered what the best penny stocks to buy are? It’s a common question, and there are endless penny stock alert services that tell you that they can answer this question. If you’ve read any of the ads and offers, they can be quite persuasive. Some telling you they know what stocks are going to shoot up in price and return thousands of percent in profits. This certainly seems like the perfect trading solution, but is it one to really benefit from in the long term?

This aggressive style of marketing appeals to the base needs of a new trader which are generally to shorten the time it takes to be a profitable trader and access to large profits with little to no outside research on an individual ticker. However, when looking at these offers, always take a step back and think about the whole picture. If an offer is too good to be true, it usually is.

Let’s take a deeper look at the different types of offers, how they work, and whether the risk is worth the reward at the end of the day.

Penny Stock Alerts: Free or Paid, are they worth it?

If you do a Google search for penny stock alerts, many at the top are simple services in which you give them your email and they send you their best penny stock alerts in return. Now, from the start, they are giving you information about stocks that they think could see gains of hundreds of percent on your investment. The fact that they are giving this information away for “free” should set alarm bells ringing. No one savvy enough to know when the next big play in penny stocks is coming from would give you that information for nothing in return.

Screenshot of a Google search for "free penny stock alerts".

So, if these offers are free of charge, what is really going on? After all, the natural question to ask one’s self is “if they aren’t asking for money, how are they scamming me?”. Basically, what the sites do is promote stocks that have extremely low market capitalizations, often just a few million dollars. Any respectable company in the same industry would likely view as worthless. The stocks are showcased for two reasons, either the people behind the penny stock alert service already own shares themselves and have depleted all available supply in the market (front-running), or someone is paying them to promote it.

In fact, in many of these promotion services (at least those that operate on the legal side of the line), you will often see disclaimers telling you the stock will crash back down as soon as they stop promoting it. Of course, you don’t know when that is, only the people behind the scenes do. If you are thinking this sounds like a penny stock pump and dump scam, you would be right. For those who follow these alerts, it is very unlikely you will be able to realize any profits. In fact, it’s much more likely you will lose money.

For those behind it all though who are paying for the promotion, they get other people to buy in, raising the price above the low point, and then sell at the optimal time, often to the people buying into the promotion, and then immediately end the promotion leaving everyone else holding the shares as the price plummets again. That is not a penny stock alert, it’s a way to part you from your money.

South Part meme with text that reads, "Money in my wallet... aaaand it's gone".

Penny Stock Alerts: Chat Rooms or Live Trading Alerts

The next step up from the basic penny stock alerts is the penny stock chatroom service, which provides a different take on the previous situation, with the group working with the promoter in a chatroom to coordinate the buying and selling of stocks. This kind of approach may seem more useful, if everyone is buying together, then that minimizes the risks, right?

Sadly, no. While there are some legitimate live trading rooms that work this way, the majority of them are set up to take money from the members. For free trade chatrooms and live trade penny stock alerts, this is almost always true. There are some premium services that try and provide a genuine service, but with variable success rates, even they do not offer a truly workable service.

So, what is happening when one of these chat room penny stock alerts recommends a stock? Again, there are two possibilities, the penny stock alert company is being paid to promote a particular stock, or they already heavily invested in it themselves before giving the buy signal to the group. Because penny stocks are low-cap with relatively low liquidity, a group of 100 traders can move the price significantly when buying simultaneously, at which point, the penny stock service, or those paying them to promote the stock, begin selling. At this point, they are still telling the group in the live chant to buy. By the time the alert services instructs its members to start selling, the stock is already on the way down, leaving members struggling to sell at a profit. A few lucky ones will make a little, most will at best break even.

This is another variation on the pump and dump, and that is not something you want to be involved with if you can avoid it.

Spotting the Penny Stock Scams

Now that you know how the scams work behind the scenes and the meaning behind the old saying  “There’s no such thing as a free lunch”, let’s look at some of the classic warning signs associated with these types of groups. There are several warning signs to be wary of when looking for the best penny stock alerts, but once you recognize them, it’s much easier to avoid the situations they put you in.

Penny Stock Scams: Unsolicited Stock Tips

If you get any tip randomly out of the blue, whether it’s an SMS message, email, phone call or just on an ad on your phone, it is most likely being sent for the benefit of the sender, not the recipient (YOU!).

Think about it, if you were wandering through Best Buy and someone ran up to you, screamed ‘Buy this stock today and make a fortune’, and then ran off, you wouldn’t take them seriously. You certainly wouldn’t then dash off to your laptop and start buying the shares. But that is, in effect, what an unsolicited penny stock alert tip actually is. Just because it happens on the internet, it is no less weird when you think about it.

Photoshopped image of a Best Buy employee holding a box of penny stocks for sale.

In general, these are the crudest forms of the pump and dump scam out there, but whether you are a new trader or an old-hand, sometimes an offer of easy profits is tempting and can get the better of us. Always remember, if you didn’t ask for the tip, there are usually strings attached somewhere.

If you do get these offers, hang up the call, block the number, set the email address as spam. The fact is you can be a successful trader, even in penny stocks,  you just don’t need that kind of help to get there.

Penny Stock Scams: “Guaranteed Returns”

One of the first things that anyone should learn on their journey into investments or trading is a simple one; there is simply no such thing as guaranteed returns. Even the very best traders lose sometimes, and that will always be true. The idea of stock trading is similar to poker in regards to the fact that you just need to win more than you lose. Anyone suggesting otherwise is a marketer, not a trader, and is selling an idea, not an opportunity to learn.

Think about this for a second, if you had spent your time creating a trading system that never loses, why would you be on the internet sending emails to other people? You have an endless supply of money on tap whenever you want it, sitting around sending alerts to other people is not the way to make the most of that.

Meme of Vin Diesel on the phone with text that reads, "It's gonna DOUBLE! Trust me!"

Another variation of this marketing message to look out for is one that mentions “no risk” involved. As with anything in life, there is always some risk in trading. Our job as traders is to manage risk, but it can never really be eliminated. In both of these cases, the promoters offer an unrealistic dream because it sounds appealing and will sell. However, for a vast majority of traders, it is impossible to achieve those levels of success and another indication of everything not being what exactly what it is sold as.

Penny Stock Scams: What’s behind the curtain?

Another area to look at is the nature of the company behind the penny stock alerts. This is actually a lesson when it comes to any kind of trading whether it is looking for reliable penny stock alerts, a forex broker, or a cryptocurrency exchange; one must always look at what is behind the curtains.

Any business involved with the financial industry as a broker, advisor, and so on, should be registered with the appropriate authorities. In the United States, this is the Financial Industry Regulatory Authority, also known as FINRA as well as the SEC (securities and exchange commission), with each country usually having their own version of this.

Never get involved with any other kind of financial service that advises to buy or sell a stock that is not registered with the relevant organization for your country. Businesses with advisory roles are required by law to show their registration number on promotional literature, so if there is none, walk away immediately.

Please remember, being registered is not an absolute guarantee that the business is reliable, especially considering most reliable licensed companies steer clear of these types of securities in their portfolio.

The idea of registration also applies to the penny stocks themselves, which due to their low value and volume, are often not regulated. Any penny stock you invest in should be shares of a company that is registered with the Securities and Exchange Commission. That means they must meet certain reporting requirements that essentially prove it is a viable, operating company and not some shell vehicle for a scam.

Conclusion: Create Your Own Trading Style

All this information may make it seem like all penny stock alerts are bad, and that this is an area of trading that really should be avoided. However, that is not entirely true. Like any security in the stock market, price inefficiencies develop in penny stocks which offer great opportunities for traders who are happy with a level of risk that is higher than in other trading styles. If that is you, then there are opportunities for profit.

However, as with most anything, blindly following a penny stock alert signal without understanding the true reason for the alert can hold back your trading skills even if you manage to find one of the few reliable ones (yes, there are some that actually offer real, workable advice amongst all the scams). By analyzing different companies for yourself, looking for signs that a chart is setting up technically or poised to make a significant announcement can be an indication of a stock that could create trading opportunities.

Eventually performing analysis yourself will help you learn and improve along the way as you gain experience and make the necessary mistakes needed to be a disciplined trader. This allows you to begin having full control of your trading instead of solely relying on a good penny stock alert. If that is all you do and the service stops, you don’t know how to make money without it.

Looking at the broader picture, the best approach to utilizing a penny stock alert service is by avoiding the scams, finding a reliable service, and then try to understand the “why” rather than “how much money will I make”. By following this approach, you will create a solid foundation that introduces you to important terms and practices that make some of the best traders successful. From there, the money comes naturally.