What is a Penny Stock?
First, let's look at what a penny stock, also commonly referred to as a microcap stock, is. The Securities and Exchange Commission definesa penny stock as follows:
'The term "penny stock" generally refers to a security issued by a very small company that trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board (which is a facility of FINRA) or OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.); penny stocks may, however, also trade on securities exchanges, including foreign securities exchanges.'
What is a Pump and Dump?
Many penny stock investors have been the victims of 'pump and dump' schemes. A pump-and-dump usually involves an individual or company buying up large amounts of shares of a low priced stock, them promoting the stock like crazy through glossy brochures, social media, and spam emails with misleading information to drive the price of the stock up. Of course, when the price goes up, the pumper dumps the stock on unsuspecting investors, and the stock crashes.
The Key to Making Money with Penny Stocks
So how do the expert daytraders make money with these stocks? First, they take advantage of the fact that pumped up stocks can be shorted. Shorting a stock, in very simple terms, means you make money when the stock drops. If you can determine when the stock has peaked, you profit as the stock tanks.
Another way you can profit is by jumping on the bandwagon as soon as the pump starts, and getting out before it peaks. The key is determining where the entry and exit points are.
Who is Making Money Trading Stocks
Do people really make money trading stocks this way? Here is a great example. Timothy Sykes, the CEO of Millionaire Media and Profit.ly, turned less than $12,500 into over $1.6 million in three years by trading stocks while still at college. He then founded his hedge fund, the Cilantro Fund, in 2003, which was ranked by Barclays as the #1 Short Bias Fund for 2003-2006.
Subsequently Sykes became an educator, showing others how to trade stocks. A couple years ago, he created the Millionaire Challenge which has a goal of making millionaires out of average investors. He has now done that twice, with his second student just breaking through the million dollar level after starting with $1,500 two and a half years ago.
Sykes's Profit.ly website provides trade alerts, watch lists, and video lessons. It also has the trades and performance of traders posted on the site.
Assuming you have the patience and drive to learn, the possibility of making significant profits trading penny stocks is within your realm. Just don't get caught on the wrong sides of the pumps and dumps.