There are a lot of players involved with penny stocks. The individual investors are merely a symptom of a much bigger production, which includes many different roles and just as many different motivations. Learning about these different figures involved helps to make a very complicated picture much more understandable.
Penny Stock Promoters – a sad truth with penny stocks is that many of them are promoted or “touted” by paid cheerleaders, whose only aim is to drive up the price of the shares.
Promoters may be “investor visibility” companies, who are paid either by cash or with shares in the company to drive up the price. They are very common, and generally operate online, especially since it was the widespread adoption of the Internet which makes most of their tactics, along with their anonymity, possible.
Generally this type of promotional firm will publish glowing research reports about the penny stocks, with very high price targets, and will distribute them to mailing lists and through free-access web sites. This is a major risk for investors in penny stocks, and the most likely way to lose money.
Founders of Penny Stock Companies – these are generally the entrepreneurs whose great idea or business has grown enough to justify the penny stock listing. They often know little about the workings of the markets and how penny stocks trade, and much of the time they could care less.
It is unfortunate that many of these founders of small companies get derailed, used, or trampled by the other types of people involved such as the scam artists or promoters.
Executives in Penny Stocks – Many times the original founder of a company will retain a leadership role in the operations of the corporation, once the shares are publicly traded. More often, however, the positions of CEO, CFO, CTO, etc, are swapped out with “experienced” executives, who may be hand-picked by the venture capitalists or investment bankers who funded much of the penny stocks’ growth.
The thing about some executives is that they believe paid-for promotion is a good way to increase the price of their shares. They may present at an investment conference, or buy coverage from one of these tout-sheets, and spend many thousands of dollars (or provide many millions of shares) in the process.
While the share price of these penny stocks may increase as a result, it is an artificial inflation, and as such is unsustainable. Prices will come back down.
Besides that fact, it is generally poor-quality companies that need to take the paid-promotion path anyway, and rarely the well-run, high-quality up and coming penny stocks.
Venture Capitalists – the money to take an idea, fund it, and grow the business usually comes from either investment bankers or venture capitalists. They may provide millions of dollars, or help the corporation raise the capital on the stock market by selling more shares of the penny stocks.
Of course, the investment comes with strings attached. Those that provide the money to these penny stocks may fill the board of directors with their own people, or place their choices into the key executive roles. This is not necessarily a bad thing, and has actually helped many penny stocks break out of the chains that their former management (often the original founder) had unwittingly built, which held the corporation down.
Scam Artists in Penny Stocks – Since penny stocks by their very nature are thinly traded, and can move dramatically in price, they make for the perfect vehicle for scam artists to manipulate. There are a lot of ways in which a scam can be perpetrated with these tiny shares, but it generally involves picking up a tremendous amount of shares cheap, then driving up the price while they sell into it.
A scam artist could be a 12 year old kid using his mom’s computer, or a well-known CEO who knowingly issues misleading press releases. Often, organized crime has been involved.
The best way to protect yourself from being the victim of a scam, is to only invest in penny stocks with solid fundamentals, like those profiled by well known analysts through subscription-based newsletters and websites.
Analysts of Penny Stocks – Professional analysts know what to look for in their investments, and those focused on penny stocks will generally provide you with much better prospects. These companies will have been professionally pre-screened, so you can rest a little easier knowing that the penny stocks will have legitimate operations and business models.
It is important that you look for those analysts of penny stocks that have a subscription cost, or else you would need to question their motivations for providing you with free penny stock picks.
By gaining an understanding of the various players in penny stocks, you’ll be better suited to avoid some of the pitfalls, while finding higher-quality investments for your portfolio. Just remember, there are a lot of hidden motivations in the low-priced stock world, and you don’t want to become a victim to them.
About the Author:
Peter Leeds reveals top Penny stock companies to subscribers of his newsletter. Learn more about Peter Leeds and penny stocks with his free online book.
