Knowing “How to Spot Penny Stock Scams“ is a good skill to have. And believe it or not, learning to spot penny stocks scams is actually quite easy when you know what to look for.
So while penny stock scams come in all varieties of pump-and-dump schemes… there are a few key things you can look for to help you spot a penny stock scam before you risk any money on these speculative stocks.
In this blog post I’ll show you the most common hallmarks of penny stock scams and how you can spot these nefarious schemes a mile away.
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Anatomy of a Pump and Dump – Hot to Spot Penny Stock Scams:
Learning how to spot penny stock scams is actually pretty easy once you understand how the scams work. That’s because most pump-and-dump, or newsletter penny stock scams work the same way. It goes something like this…
Some newsletter promoter, boiler room chop shop or “penny stock guru” will slowly build up a position in a speculative penny stock. They will slowly buy a couple hundred or thousand shares a day for a month or two until they have a pretty significant supply of penny stock.
Next, they will start to promote the penny stock. This might be in the form of falsified research, skewed statistics or just a really aggressive sales pitch. Penny stock scam artists rely on people’s desire to make a quick buck. They make it seem like you can double or triple your money without any risk. Then…
After a flurry of penny stock promotion some of the people being pitched on the stock will start to buy it. Since these penny stocks are traded on such low volume, even modest buying can start to send the price up. Once the penny stock starts to go up in price other newsletter subscribers or guru followers being pitched on the stock will buy it as well, since they perceive the prophesy as being fulfilled.
As interest in the stock idea reaches a fever pitch, the guru or stock promoter will start to unload his or her shares of the penny stock. They will sell all or most of their shares to all of their loyal followers who are then left holding the bag. Typically since the penny stock scammer has built up such a supply it will cause the price of the penny stock to go back down. Without the fake interested being created, the volume of the stock evaporates and traders are left facing a very wide bid/ask spread with no sign of getting out of their positions even.
Once the penny stock scammer has sold all of their stock, they will move on to the next penny stock and try to burn a new group of followers. Wash, rinse and repeat. Penny stock scams are a dangerous game.
Now that you know how penny stock scams typically unfold, here are two easy steps you can take to help you avoid danger:
How To Spot Penny Stock Scams – 2 Red Flags:
Since most penny stock scams work the same way it’s pretty easy to spot them. And there are a couple key indicators you can look for to determine if you are facing a penny stock scam or not.
(1) Low Volume Is A Danger Sign: You can learn how to spot most penny stock scams by watching the average volume of a stock. The reason people often get trapped in penny stock scams is because after the promoter dumps the stock or runs out of people to rope into the scam, the bid volume will dry up. Then you are literally left holding a penny stock that nobody wants. One way to avoid this is to use a hard and fast rule not to buy penny stocks that trade too thin. A rule of thumb I like to use to avoid penny stock scams is not to buy companies where my trading would make up more than one 1/1000 of the daily volume. For example: if I’m looking to buy 200 shares of a company I want to see the average daily volume for the last month be at least 200K shares. Make sense? When you keep an eye on average volume (not current volume) you are much more likely to be able to exit your penny stock position on your own terms. And that’s the first step to spotting expensive penny stock scams.
But to further reduce your risk…
(2) Check Your Speculation At The Door: Penny stock scams are notoriously speculative. And if you know how to do a little fundamental analysis you can easily avoid the most dangerous of the penny stock scams. Often times the promoter of the penny stock scam will be trying to sway you to buy the stock based on some new research, a breakthrough into a new market or a successful clinical trial result. But all that is speculation, not investing. In these cases, you need to look at the valuation of the penny stock just like you would any other investment. You need to make sure you have a margin of safety and that you aren’t paying too much for pipe dreams of earnings growth. If you are going to speculate, at least make sure the stock is sufficiently liquid and define your stop-loss BEFORE initiating the trade.
And by the way, if you’re wondering how to keep a margin of safety in your penny stock trading, watch the short video below..
Stock Screener: How To Avoid Penny Stock Scams [VIDEO]:
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