Penny Stock Red Flags

| April 2, 2012 | 0 Comments

Penny stocks, at first glance, seem like a great investment. They are cheap, and the stories of investors profiting mightily from them abound. While some penny stocks are indeed a great value, there are some red flags to look for when considering investing in this area.

The first red flag is a stock with a five letter ticker symbol. While the first four letters of a stock ticker symbol indicate the company with which it is associated. But, the fifth letter corresponds to a code, indicating any number of things about a stock. Sometimes these attributes are rather benign. For example, “F” means that the stock is foreign, and “D” means the stock is a new issue of an existing stock. Neither of these are cause for concern. But sometimes the attributes are more sinister. An “E” means the company has not properly filed its data with the SEC. This indicates that the company is less than responsible, and that the data on the stock is out of date, both of which translate to a likely sub-par investment. A “Q” indicates that the company has begun the procedure for filing bankruptcy. Obviously a bankrupt company is rarely a good investment. So, while a five letter ticker symbol is not in and of itself a red flag, it can indicate problem areas.

Another red flag is being cold-called by a high pressure penny stock broker. Often, companies will pressure potential investors into buying relatively high numbers of a stock, especially when compared to the market capitalization. By convincing many brokers that they have insider knowledge of the best penny stocks to buy, they create a frenzy. Then because of supply and demand, the stock price will tend to rise, and the company will use this to pressure more people into it. However, the stock will eventually crash, leaving the investors with a huge loss.


Category: Penny Stock Alerts

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