Author Topic: I know they're often risky garbage, but does anyone dabble in penny stocks?  (Read 9635 times)

sloof70

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Back in June, lured by the prospect of owning a massive amount of shares, I put down a little money on a company who's shares were trading at 10 cents.  I had just been given the product they make, happened to look up the company and find out they are publicly traded, did a little research, and thought "why not?"  Was new to buying individual stocks and wanted to try a little this, little that.  It dropped to 2 cents about a month later, but I kept it and sold it today at 34 cents (240% gain in half a year).  It was stupid and I thought it'd be best to get out while the gettin' was good.  But now I'm thinking to myself that such investments might be worth a couple percent of my overall portfolio, if only for the hell of it.

Do any of you more sensible individuals every throw a few shekels at these?  I know they're terribly risky, the other 99% of my portfolio is mutual and index funds, so I wanted to have some fun.

marty998

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Yep I do it, the penny dreadful mining stocks on the ASX. I haven't won big or lost big yet, but it's fun when a stock goes into a trading halt or suspension pending release of an exploration or financing update.

I've been accumulating a little copper play called Avanco Resources (ASX:AVB). On the cusp of production, projected low cost mining operation, partially backed by Glencore/Xstrata. If the pundits are right and it takes off then I could probably pay off the rest of my mortgage.

Well done on your win.

KingCoin

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I think they're especially interesting if you bring to bear an area of expertise and can do some basic security analysis.

Knowing the product is also huge. Does the company make a real product or service that you know to be good? This will eliminate a lot of the paper shuffling shell companies that exist for little reason beyond bilking investors. Some of my best recent micro-cap finds have been the result of a process similar to the OP's. I found a product or service that I liked and perhaps at the cutting edge of a trend and checked to see if the company was publicly traded (Tucows, Toffuti).

Whatever you do, don't invest based on some super-upbeat article, newsletter, email, or tip from your brothers broker. You don't want to be on the wrong end of a pump and dump. These opportunities are best found organically.

sloof70

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Whatever you do, don't invest based on some super-upbeat article, newsletter, email, or tip from your brothers broker. You don't want to be on the wrong end of a pump and dump. These opportunities are best found organically.
After I bought this, did a little reading on that "scam".  Luckily, this was just one of those things I found.  I think it could be a fun adventure to learn about micro- and nano-cap stocks based on something you bought or used and put a couple bucks down to see where it goes.  This one paid for my 2014 PBR budget, so maybe I'll find another to cover my recreational drugs.

Self-employed-swami

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I've also thrown $500 at penny stocks before, and not really made or lost anything on the whole.  I bought a couple mining companies that were due to release prospect plays, and one company that made flexible light poles, that bend instead of break under weight (like in the current ice storm).

kingcanute

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I don't really have time to do this, but would if I ever try out the early retirement thing - but look into shorting these things more than buying them. Only ever hold (long or short) for very short durations. Assume all penny stocks are scams unless you really do a ton of work to find out that they're not. And even if they're not, chances are they will do 100 million secondary offerings and dilute your holdings anyway, so stay away for investments - only trade these things. For more on what I'm talking about, check out:
http://www.timothysykes.com/

soccerluvof4

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I've traded penny stocks for years. But remember a penny stocky really is anything under 5$. Having said that Marquette University a kid most recently made millions on 1500$ after quitting once and trying a second time. I am sure you can go to there school web site and find his story. It was a good read and I just read on Saturday.

The key is as i am sure you know in any investment do your homework. But i feel it can be constructive and profitable part of trading portfolio not to mention some fun and there are some penny stocks with good support to own. Some that i hold and would consider after you do your homework would be....VTG ,ASCP, ACI and TXMD and PSUN. These all have at least some solid catalysts to move forward. This also gives you some diversification.  Good luck!

Full disclosure i am long these names but in NO WAY is this a recommendation!!!

dragonstache

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How does one actually do this? I know microcaps are often listed as "OTC" stocks. What does that mean? Could I buy them with a brokerage account in vanguard or options house or do you need something special? Should I go to the pharmacy?

innerscorecard

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I will paste this story from James Altucher's newsletter for you. I apologize for the length but I think that reading the whole story is quite relevant. You can make your own decision on investing in penny stocks after reading it. :)


The Iceman of Wall Street
BY JAMES ALTUCHER


 
"Jordan Belfort lined up all 200 employees and said, 'Some of you are good. Some of you are no good and you need to get the hell out of here'.

This was his management style. Then he walked down the line one by one and would say, 'you're good. you stay.' and then 'you're no good. Pack your desk and get the F out.'"

My friend was telling me his story of twenty years ago when he worked for "The Wolf of Wall Street", Jordan Belfort, played recently in the movie by Leonardo DiCaprio.

"What did he say when he reached you on the line?" I asked.

"He said, 'you're good. We need to put people under you.' I said, No thanks. 'I don't give lessons.'."

I knew my friend had been in that scene in the 90s but I didn't know he had worked directly for Belfort.

We were eating lunch but I stopped eating and started asking questions. If you ever get me started, I get really curious.

"How did you start working there?"

"It was a small community back then. All the penny stock brokers worked in one area and we'd hang out together and shoot pool. I was known as "the Iceman" because of my name and because I was really good at closing customers. I'd close 7 or 8 good customers, or whales, per week on my good weeks.

"So one day, I was shooting pool at one of the usual bars on Hanover Square and these guys came up to me and said, 'are you K... [I'm keeping his name private because of what happened later]' and then they said, 'we're from Stratton Oakmont (Belfort's firm) and we'd like you to work there.'

"I didn't even look up from the pool table. I said I needed a $30,000 signing bonus, an office, and five cold-callers working for me."

"Wait a second," I said, "you wouldn't do the cold calls yourself? How would the cold-callers know what to do?"

"I had a script for them. They would go through the script and pre-qualify and I'd get on the phone with guys who I knew were whales. You know, big guys.

"So in two days I had my office at Stratton Oakmont. No interview needed. I told my old boss at AS Goldman that I was taking all my clients, but if I wasn't happy at Stratton I'd leave and be back in a few weeks."

"Once you got there you just started in? How'd you do?"

"I was doing great. Back then nobody knew what the bid and ask was on a stock unless they read it in the paper the next day. So we'd take all these penny stocks at the end of the day and put out a huge bid so it would show up in the paper and our clients would think they had big gains. Meanwhile, we'd have almost up to 40% commissions per client."

"But wouldn't the clients lose money in the end? Wouldn't they realize it?"

"The smaller ones would. I'd wipe them out so the bigger ones could make money. Don't forget, this is exactly what Merrill and Fidelity were doing also. We were just 'small enough to fail'."

My friend took another bite from his salad. We hadn't seen each other in a long time and he came up to Cold Spring for the day and we hung out while my kids were in their various dance classes and performances. I love seeing my kids perform but I couldn't stop listening to this story.

He said, "There was a scene in that movie where they took my cold-calling script actually and acted as if it was Belfort's script. But I had taught him that cold-calling script."

"What was it?"

"I shouldn't say it was all mine. It was going around the street but I had my own changes to it and it worked almost every time. I'd call up a client and say, "Hey Dr. A, this is K, remember we spoke six months ago when Intel was at 32 and I was recommending it? Well now it's at 60. So I've proven myself and now I have another HUGE stock that I think is going to do much better so let's set up your account and I will get you started.

"The key is," K said, "Is that I DIDN'T speak to him six months ago. This was the first time I was ever speaking to him. But so many brokers would be calling him all the time he'd have no memory one way or the other.

"So I'd say, 'I told you back then I would prove myself to you first and now I did so we should get started." "

Claudia was there. She asked, "What if he said I have to ask my wife."?

K said, "Ha, that was the most common objection but I would address it before he even brought it up. I would say, "You want to buy that big extension to your house. Who's going to make the money for that? You are. Who will decorate it? Your wife. This is the biggest stock market boom ever and the stock market is about making you money and buying that house.

"I had another one," K said, "I would say, if you're driving down a deserted highway in the middle of the night and your tire goes flat, who would get out of the car and fix it? You or your wife? You would. Some things men do and something women do."

K said, "Every bank was doing this, by the way. None of them were innocent. We were just doing this with penny stocks. Heck, Bear Stearns was clearing all of our trades. They didn't make one objection. All the banks were doing the same thing. I was 19 years old, I had no sense of whether what I was doing was right or wrong. I was like a kid.

"I remember the first payment I got. $25,000 in cash. I brought it home and showed my mom. She said, 'I may just be a hairdresser but I can tell you that nothing good comes out of it when there's this kind of money all in cash'. But I couldn't help myself. I really didn't understand anything then."

"How long did you stay at Belfort's firm?"

"Ten days," K said, "I didn't like driving up to Long Island. I liked Wall Street. So I went back to AS Goldman in just ten days."

"Did you give back the $30,000 signing bonus? I mean, you were just there for about a week."

K laughed. "Of course not."

"What's the craziest thing you saw at one of these places?"

K said, "All of these places were heavily mafia. There was so much money going around that all the different mafias were working together. No fighting.

"One time there was a guy in Florida that was heavily shorting a stock we had A LOT of money in. It was a stock that owned a baseball field that was never going to get built and I guess this guy knew it and was bringing down the stock price every day.

"So we invited him up and the head of the firm said 'We want to be friends and do business with you'

"So the guy from Florida comes up and the next thing I know he's coming out of the CEO's office rubbing his neck and blood is all over his face. The CEO comes out and puts his arm around the guy and says, 'See, now we're friends. Now I know we can do business together.'

"And then the law eventually caught up with us. I was working at one of the other firms at this time and everyone got arrested. I had the FBI in my house. I was handcuffed. It was in the news. We were all charged and I was facing 12 years. I made bail and that night I was invited to a dinner.

"I went to the dinner and I recognized everyone at the table. All mafia.

"So the next day when I was at the FBI they said, 'we can get you off without jail time if you give us this guy' and they showed me a picture and I remembered that dinner and I said, 'I never saw that guy' then the FBI would show me a picture of me walking with the guy and I said, 'I walk with lots of guys. I don't know who they are.' This went on for weeks. Sometimes they would keep me overnight in jail cells for a few days just to scare me but I was more scared of the people I saw at that dinner."

I knew K had never been to jail. I asked him, "How did you avoid jail time?"

He said, "I was 19 years old for one thing. And then Morgenthau [the NYC DA at the time] put this list in front of me and said, 'these 11 guys are going to testify against you'.

"I went and got a baseball bat and went to the house of everyone on their list and asked them point-blank if they were going to testify against me and they all said 'No' and ten of them signed letters saying they weren't going to testify against me.

"I brought that list and the letters to the judge and the judge threw the whole thing out except for probation with no time served. He specifically said to Morgenthau, 'why are you trying to put a 19 year old guy in jail?'"

We finished our lunch. I had more questions. I knew K felt bad about everything. We had talked about it before. It was 20 years ago. People change.

Sometimes the problems from yesterday morph into new problems, the problems today. I knew K had his problems but they were much more personal and that was part of the reason K was visiting me that day. K's almost 40 now. People change and I knew K was making his changes for the better. I knew how he had spent his 'time served'.

People say to me all the time, 'how can you hang out with so-and-so'. No matter who I hang out with there is someone always ready to judge them. Or judge me.

I never know the answer. I don't judge people on what they did 20 years ago. I want to be around people who are good people right now. Who are making positive impacts in the people around them. I can see those impacts. We all were 19 at some point (or 26, or 32, or whatever) and I'm no innocent either. Most people aren't.

I think about: do I love myself. I don't judge anyone else.

K's friend, who had been waiting for him for four hours after driving him 80 miles to my house, picked him up and took him home. There are other parts to this story. There's a reason K had to visit me this Saturday. He was shaking as he walked into his friends car.

Twenty years of stress and anxiety sometimes add up to something that can't be hidden. There's a river of sadness that flows through every story and we only see the surface.

Another time I will tell that story. Because the story always finishes one way or the other.

wtjbatman

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I invest my emergency fund in penny stocks. If one of them hits it big, I'll be ready for any emergency I can think of.

hodedofome

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Yeah I knew a guy that used to work in a shady investment bank that did pump and dump schemes on penny stocks. He eventually came to his senses and got out of it. Then, he started a hedge fund and tried to figure out all the stocks that his previous employer was pumping. For years he shorted these stocks and never once lost money. Not even once. He now runs his own family office but that was essentially his only strategy in his hedge fund days.

You have to remember that there is an entire industry full of outright criminals that are actively trying to take your money. They work in big teams of investment bankers, newsletter writers, 'advisory' services, brokers, shady journalists and yahoo message board/seekingalpha monkeys to make a stock look great right before the rug is pulled out from underneath you.

Look at PLUG as a recent example. Just ridiculous. It finally broke down yesterday and was down 48% from the high of the day.

I'd read KingCoin's post over and over again until you can recite it from memory. There is money to be made in microcaps IF you can do your own research and never trade based on somebody else's opinion.

smedleyb

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I darted in and out of a couple weed stocks recently, but they're so cheap, they're so pink sheeted,  to mention them would be more of a disservice than service. 

Tread if you must, but tread carefully. 

Willbrewer

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I have a recreational pot-folio of a half dozen stocks, four of them being penny stocks. One pick I have 10,000 shares of cost $82.00.  If that one goes up a penny, I'll make a cool $100! I'm hanging on to them just in case one or two happen to take off. One is doing pretty well so far. It's up over 41% as of today, and with the rest losing money, I'm still over $90 ahead.

KingCoin

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warfreak2

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Does anyone follow those pump-and-dump scam mailing lists so they can short those stocks? I presume that's legal since it's not manipulating the market.

KingCoin

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Does anyone follow those pump-and-dump scam mailing lists so they can short those stocks? I presume that's legal since it's not manipulating the market.

I wonder if there's any borrow available on penny stocks. Intriguing idea though.

anisotropy

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penny stock? or did you mean scam stocks? ;)

go OTC OTC OTC OTC !!!!

bwall

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Does anyone follow those pump-and-dump scam mailing lists so they can short those stocks? I presume that's legal since it's not manipulating the market.

Pump & Dump is illegal. People still do it, but's it's very illegal. No shade of grey.

arebelspy

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Does anyone follow those pump-and-dump scam mailing lists so they can short those stocks? I presume that's legal since it's not manipulating the market.

Pump & Dump is illegal. People still do it, but's it's very illegal. No shade of grey.

I'm sure wf2 is aware of that.

What he was saying is that when you receive one of those P&D emails you short the stock instead.  You had nothing to do with sending the email, but you try and act counter to its advice.  Nothing illegal about that, as long as you aren't one of the ones pumping it.  Still, have fun trying to convince the SEC when they come probing.

And, IIRC, this has been tried with not great results.  There was a study floating around you can probably find.  How do you time it correctly?
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warfreak2

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C.f. following an arsonist around so you can toast marshmallows; detestable, sure, but I can't think of a law against it. I only asked if anyone was doing it, I wouldn't do it myself.

Put options would be safer, timing could be predicted from watching the scammers operate for a while. I wasn't able to find the study you referred to - anything else you remember about it?

KingCoin

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C.f. following an arsonist around so you can toast marshmallows; detestable, sure, but I can't think of a law against it. I only asked if anyone was doing it, I wouldn't do it myself.

Put options would be safer, timing could be predicted from watching the scammers operate for a while. I wasn't able to find the study you referred to - anything else you remember about it?

Options don't trade on the vast majority of penny stocks.

Borrow fees (if you can get borrow at all) often run 25%+ for illiquid securities.

I'd also be interested in the study if anyone finds it.

Willbrewer

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My 10,000 stock, $82 investment rose quite a bit today because of a positive report. I liquidated and took my $33/41% profit. That's just about exactly what my total daily avg living expenses run, so woohoo, I earned my keep today.

soccerluvof4

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PSUN which is one i listed above is up today on an earnings beat. I believe management will keep unlocking value and can easily be a double. If you do your due diligence you might come to the same conclusion.

Those are my opinions and not a recommendation in any way. Do your own research.

I am not long the name any longer.

bwall

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What he was saying is that when you receive one of those P&D emails you short the stock instead.  You had nothing to do with sending the email, but you try and act counter to its advice.  Nothing illegal about that, as long as you aren't one of the ones pumping it.  Still, have fun trying to convince the SEC when they come probing.
[/quote]

Right. I mis-read the post. Thanks for the clarification.

KingCoin

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PSUN which is one i listed above is up today on an earnings beat. I believe management will keep unlocking value and can easily be a double. If you do your due diligence you might come to the same conclusion.

Has a $200mm+ market cap and is NASDAQ traded. Don't think it qualifies as a penny stock.