The allure of penny stocks lies in their affordability. A stock priced under $1, such as $0.69, may be an attractive option, especially when a sudden price increase of 40% or more is reported. That draws many new traders into the fray to chase after such gains.
However, most penny stocks are thinly traded and have low market capitalizations, which makes them very susceptible to manipulation. This is the perfect environment for fraudulent activities, especially pump-and-dump schemes, because of low price and low volume.
The Reality of Pump-and-Dump Schemes
Pump-and-dump scams are common in the penny stock world. These schemes involve the artificial inflation of a stock’s price by a group of individuals or a company, typically using social media or email alerts to encourage other investors to buy in. The idea is to create a buying frenzy, push the price up and enable the scammers to sell their shares at that higher price. Once they sold their shares, the price would crash, and unsuspecting traders who followed that alert would be left holding worthless shares.
The key understanding to pump-and-dump scams is realizing how easy it is for a few investors to control a stock if the daily volume of it is low. For instance, a stock with an average of only 8,391 shares traded daily and priced at $0.69 might be manipulated by a service with a few thousand subscribers or a group of people. By buying up as many shares as possible and then alerting their followers about the “hot stock,” they can artificially inflate its price. Once the price is high enough they sell out of their positions, crashing the price to virtually nothing as the late entrants remain stuck with a loss in this scheme.
The Annoyance of Penny Stock Alerts
The excitement for penny stocks will often rely on alerts indicating quick cash returns. Of course these alert services and programs can state they own an edge in their systems or their complex algorithms uncover the future winner. However, this type of advice is often quite unreliable and can lead to disastrous results. The scammers behind these alerts know exactly what you want to hear: that you can make money quickly with minimal effort. They show you supposed success stories, complete with broker statements and screenshots, but remember—these can be easily faked.
The issue is that most of these traders do not understand how these alerts can be manipulated to sell them a particular stock that the promoter has to sell. The individual buys into the said stocks because they are promised the price will skyrocket. The con artist sells his or her shares when the price becomes sufficiently high, leaving those who followed the advice holding worthless stocks. What was once an exciting trade turns into a losing position, often with no way to recover the funds.
Why Day Trading Requires Professionalism
Day trading is often viewed as a way to make fast money, but this mindset is dangerous. It’s important to understand that day trading is not a get-rich-quick scheme. Rather, it’s a profession that requires dedication, skill, and knowledge of the markets. Trading penny stocks based on alerts is more like gambling rather than professional trading. To succeed as a day trader, you must learn how to analyze stocks, understand trends, and make decisions on data rather than hype.
While it’s tempting to jump into day trading and hope for fast returns, it’s essential to take your time and educate yourself. Instead of being reliant on penny stock alerts, you should learn proven strategies in trading that are rooted in sound principles and thorough market analysis. A good foundation in trading will get you away from scams and better-informed decisions. As a matter of fact, one good way to begin is to learn strategies like the “Rubber Band Trade,” a technique that I still use and that proves to be effective in trading.
Avoiding the Pitfalls of Penny Stock Trading
The best advice that any day trader in penny stocks should take is to approach this activity with caution. If something sounds too good to be true, then it probably is. Trading penny stocks based on alerts often turns out to be a recipe for disaster and may result in significant financial losses. Rather than focusing on cheap stocks and quick profits, take the time to learn the market, create a trading plan, and adhere to it.
One of the biggest mistakes is to jump at the chance to day trade for emotional or fear-of-missing-out reasons. There is money to be made in day trading, but only if approached with the right mindset and having a strategy.
Do not rely on alerts or rely on others for your decision-making. Educate and develop your skills, making sure to trade responsibly. Penny stocks are so enticing because of their low prices and the potential for big money, but they’re high-risk, especially when services offering alerts are promoting pump-and-dump schemes.
Trading requires a professional attitude with an attitude to learn and an aversion to getting rich overnight. It is rather hard to learn to get big money instead of just playing easy money. By doing so, you’ll be better equipped to navigate the world of day trading and avoid falling into the trap of penny stock scams.
