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I am a skeptical and opinionated person and so far I have purposely avoided from unpopular topics and written some fairly vanilla “how to” articles on trading topics .  But I just suffered through an article that made my head spin : the article concerned Penny Stocks.

As a 25 year veteran of daytrading on both the CME and CBOT and the Chicago Mercantile Exchange there are only few areas of investing that are plagued with more vice, scammers and sheer(a) cheating than the penny stock pink sheets .

I realize , that is a very irratating statement to voice ….but I will back up my statement with hard facts and experience, and not all Penny Stocks are infected …but the overwhelming majority of Penny Stocks are often fronts for companies that may/or may not exist .

Here is how the life of a Penny Stock developes .  As you may have noticed , many penny stocks are popularized through newssheets and advertising.  There is a very good reason for this, as the penny stock companies can often prognosticate the newsletter advertisers a a portion of stock in lieu for manipulating the stock price to rise .  The newsletter frequently overpromotes the “potential” for the stock to go up in value based upon certain factors occurring and usually exagerates on the unbelievable potential the stock has should these “certain” factors occur.

I frequently recommend that unsuspecting investors in penny stocks contact the c corporation itself and ask about capitalization and revenues.  Without exception, these stocks usually are pathetically undercapitalized and have no cash stream to speak of .  frequently , an investor quizzing the company will be sent to an answering machine or the newsletter promoting the penny stock.  The SEC has calculated that the majority of penny stocks fall into the “pump and dump” category. And with good reason.

A normal stock, traded on an exchange, usually has a firm picked as a market maker in that equity offering , along with a floor specialist who facilitates the trading of that stock.  This system creates transparency in the orderly operation of any stock and gives an i trader to see the audited and verifiable volume and price movement of the security.

This orderly procedure is non-existant in the Penny Stock market, and the penny stock issues are frequently without a recognizable market maker.  All too often , the market maker in a penny stock organization is the very company itself.  The fox is in the henhouse, so to speak.  What this means is that the Penny Stock company is setting both the bid and ask prices on its own stock.  Often , a disturbing number of Penny stocks are traded on the ‘Pink Sheets” which puts it into the category of trading in the wild west.

Well schooled experts have estimated that 9 out 10 Penny Stocks go under inside the first year of their offering.  I have read about numbers as low as 7 out of 10 bandied about, but the point is simple .  When you are day trading Penny Stocks you are working in a non-transparent, non-exchanged oriented market, and this is the making for catastrophe.  It is usually just a matter of time.

For the record, I am not proclaiming that all penny stocks are bad or dangerous , just the majority of them, and odds do not favor permanent success.  Heed my warning and prosper , there are simply too many exchange traded stocks that will earn you ample money than risking a single cent of your hard earned money in the Penny Stock Market.