Information SourcesUnderstanding Penny Stocks by Peter Leeds

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Watch Out for These Dangers

If you are looking for a service that picks penny stocks for you, or even if you are just trying to get extra information on that investment you have been watching, you should keep the following principles in mind.

Ulterior Motives in Penny Stocks

Is your 'source' promoting the penny stock because they want to help you achieve big returns? Probably not.

In many cases, the publisher of that penny stock report, or the salesperson calling you about the latest hot penny stocks is being motivated by their own profits. They often get compensation from the companies they talk about, and that compensation is often in the form of shares. Thus, if their efforts drive the share prices higher, they are looking at a pretty profit.

To get a better idea of the kind of scams running amock out there, check out the movie, "Boiler Room."

Approximately 75% of the penny stock promoters (whether web pages or printed newsletters or otherwise) have ulterior motives which may be very dangerous to your capital, and the same can be said for over 95% of the services that give the 'advice' away free.

You can protect yourself by asking questions, by reading the disclaimer of each service word by word, and by building a relationship with the people running the service before you even think of following their advice.

In addition, remember that most services that tout penny stocks manipulate or mis-state their track records, and they are not afraid to lie to you if that means they may make a few bucks.

If you get an opinion from a friend or co-worker you should put some stake in it, but remember at the same time that their experience with the service and the penny stocks they have traded will be different (whether better or worse) than your own.

Your best bet is to go with a professional service, although these are few and far between in the realm of penny stocks. When I wrote this book, one of my driving motivations was to use it as a tool to generate awareness of the benefits of penny stocks, and to encourage investors to become subscribers to our newsletter at If you are looking to use a penny stock picking service, at very least I would encourage you to visit the web site and decide for yourself if it meets your needs. accepts no compensation from the companies featured, and always keeps your best interests at heart.

When the media is looking for experts in the area of penny stocks, they go to Peter Leeds. We've been interviewed by CBS MarketWatch, Yahoo!, the Associated Press, FOX, LA Times, CBS, NBC, and many others.

Penny Stock Danger List

  • Ulterior Motives
  • Tips at Work
  • Specific Prices
  • Message Boards
  • Professional Analysts That Are Not Really That Professional

Tips at Work

No matter how excited your co-worker is about a penny stock, and no matter how amazing it may sound, when you are hearing a penny stock tip you should instantly become wary.

You may be the ten thousandth person that same information has passed through, and I can almost guarantee that you are not the first, and you are not the second, and you are not the one hundredth. (That even applies if this tip is from his "cousin's friend." It's from everybody's cousin's friend!)

The more urgency you feel to rush out and buy the penny stock, the more likely it is that others before you have done the same thing. The more incredible the story that the company boasts, the more likely it is false.

Be aware that there are devious forces at work who make a very good living starting penny stock rumors. They plant the idea in the heads of a few of their friends or associates, and the concept spreads.

Even after it has migrated away from the source by passing through two dozen different people in each direction, those that continue to spread the rumor always seem to think that this 'special knowledge' comes from their friend's sister. Or the brother of a guy at the plant who knows a friend of mine. It doesn't.

While your friends probably have very good intentions, and are honest people, they have fallen victim to a trap in penny stocks that is beyond their control. You can then either add yourself to the casualty list, or protect yourself from the fallout.

Ask Your Friend Any of These Questions.

  1. What are the company's revenues?
  2. What is their debt load?
  3. How many outstanding shares are there?
  4. What is the name of the CEO?
  5. Who are the competing penny stocks?

If your friend can not answer these, you should probably wonder how much he really knows.

(By the way, he or she will probably answer #5. It will go something like this: "They have no competitors! The technology is patented, and it is so revolutionary that they are the only ones who have North American distribution rights and blah blah blah...")

This is not to say that you will never be approached with a penny stock tip that could possibly make you some money. Just fight off any impatience you feel to gobble up $50,000 worth, and as always with penny stocks, do your own due diligence.

After that, if you still feel inclined, you can proceed with confidence that you are taking full responsibility for your actions. If the penny stock tanks after you buy it, you may want to blame your friend, but it is really your own fault.

You should also know that on some occasions you may be able to get involved with one of these promotional penny stocks and make money, despite the fact that it is a terrible operation, or the interest is purely based upon some rumor running rampant. As more and more people buy in, the share price may climb even if there is no justification besides the rumor mill.

If you are getting involved while keeping this in mind, and you are willing to accept the risk, and you think you are buying in early enough, you may be able to turn some profit. However, everyone always thinks that they are in early enough with penny stocks, but they almost never are.

Specific Prices in Penny Stocks

If you ever are given specific prices that a penny stock is supposed to hit, you should immediately feel cautious. We are not talking about becoming a subscriber to and getting our target buy and sell prices that are based on research and calculations. We're talking about the tip you hear where your colleague is saying that "As soon as ABC gets the patent, the stock is going to hit $7.00!"

Firstly, the $7.00 number does not come from your colleague's research. It comes directly from the mouth of the promoter who started the rumor, because he will be selling at $5.50. He needs to make sure that all of his 'goats' are locked in, waiting for that last price spike while he unloads his shares. Without a target high-price as bait, profit-takers may erode his efforts before he skips town.

In addition, beyond providing price opinions that are based upon professional research, it is not legal to guarantee, or otherwise imply a guarantee of a future stock price. While some traders are better than others at predicting share price activity, no one can know the prices to which a stock will travel, and if they pretend to, they are either dishonest or naive.

Professional Analysts That Are Not Professional

It seems that every penny stock web page out there is claiming to have professional analysts and research teams. As most of the penny stock web sites are programmed by kids using their parents' computers, it makes me wonder exactly what they mean by 'professional' and 'research team.'

It also makes me feel bad for the innocent web surfers who were snared by this trap. Certainly they had no way of knowing that the claims were false, but it is nearly impossible to encourage regulatory bodies to take any action against these claims.

If you are going to try one of these other services, despite my continued warnings as well as the shameless promotion of my own service, make sure to test them with questions.

Penny Stock Message Boards

Never have I seen such a cesspool of mis-information. I highly recommend avoiding them at all costs. In most cases, a message board's activity is made up of a handful of individuals arguing with one another, their positions being driven mainly by whether or not they own shares. And as often as not, their comments are so incorrect or misunderstood that they do more harm than good.

A message board is the tool of the naive. Use the quality research techniques we have described in this web site and leave the message boards to the monkeys.