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Penny Stock Picks: The Promises and PitfallsPenny Stock Picks: The Promises and

hen trading any security you really need to do your homework. If you do not, and the price per share drops, you have no one to blame but yourself. Stock picking sites and bulletin boards often allow a trader the benefit of finding many emerging companies. These are great places to start but you must always do your own "due diligence".

In the interest of full disclosure, There are many different types and styles of pick sites. Most are not very good, a little shady, or sometimes even completely illegal. Just recently I saw a site pick a stock on one day, but post that it picked the stock 2 days earlier. These types of practices are "shady" to say the least. The SEC investigates these companies as "pump and dump" scams and has many convictions.

Stock picking sites you should avoid using are ones that use false advertising and misleading statements. These sites will often state unrealistic gains, "this stock will go up 10,000 percent" or "this is the greatest company ever". As I said earlier, some sites will even tout a false history. Saying that their picks go up a certain% when they never picked these stocks or changed the dates on their picks. In reality no one knows how a stock will do, through solid charting and research you can put the odds in your favor.

Also watch out for these trigger words "guaranteed", for a "limited time" we have "insider information". If you feel pressured to invest, it's probably not a good thing. Sometimes you will want to get in at the bottom, or the support level of a stock, especially of a penny stock. If you feel pressured to buy though you should probably think twice. If you think you're a victim of internet stock fraud or a pump and dump scheme report them to the SEC at enforcement@sec.gov.

This type of "pump" follows into bulletin boards and chat rooms everywhere. Sometimes these are just novice traders attempting to make their stocks rise, at other times they are paid representatives of the company making misleading statements in order to keep the price per share higher while the company dilutes.

Trading in penny stocks and micro cap stocks can be very treacherous, but can also be very rewarding. You must look at what type of trader you are when trading these stocks. Are you a day trader, do you "flip" stocks that are running, or are you an investor. Often "day traders" will buy a stock that had news or had been "picked" by a site right at the opening bell then attempt to sell the same stock a few minutes later. An investor on the other hand will buy a stock to hold for long periods of time in hopes that the security becomes the next greatest thing on Wall Street. Know what type of trader you are, plan your trades ahead of time and do your "due diligence".


Article written by Keith Guyette.
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