Friday, February 19, 2010

Why penny stock tips are a scam

The following is conjecture on my part, but it seems sound to me.

Here’s my easy, step by step guide to becoming seriously rich with penny stocks.

  • Create a simple website telling people to sign up for your penny stock tips.
  • Advertise the site anywhere where uneducated potential investors might be. (The greedier and stupider the better.)
  • Choose a penny stock which seems like a good investment. Ideally you’ll do some good research and find a sound deal, but you can just pick one at random if you like.
  • Gradually buy up a bunch of stock in that company at its current low price.
  • Create 'sell orders’ with your broker to sell the stock if it goes up by a certain percentage, let’s say 25% up from where you just bought it.
  • Write a convincing letter about why you think this stock is about to “EXPLODE!”. Say you’ve got some magic system which is almost always right.
  • Mail all the people on your mailing list to tell them to ‘buy it right away’.


  • Your mail goes out, and some percentage of your readers buy the stock.
  • As penny stocks have low volume, there are few people currently attempting to sell the stock. This means that the people with sell orders (you) can pretty much ‘name their price’. This is different with regular stocks where the volume is so high that there are lots of people trying to sell the stock around the current price.
  • They buy their stock from you, at the price you decided that you wanted.
  • The stock price (i.e. what people are paying for the stock) shoots up, just as you predicted! (You’re a genius!)
  • The people buying the stock have a short period to resell it to others caught in the frenzy.
  • Then things calm down. There are no more frantic buyers to push the price up. Some people sell at a loss to get back out, and the price of the stock starts falling back down to the pre-boom level. Unfortunately, your helpers are stuck with stock that’s hard to sell and people aren’t buying – but that’s not your problem.
  • You get to cite the huge gains as proof positive of your skills, which makes more people trust you in your next pick!

I was excited by penny stocks until I worked this out. I might be a bit wrong in parts, but my magic system tells me I’m pretty close.

I also found this post on Yahoo! Answers to be quite sanity inducing.

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