What's the story behind penny stocks? How do they make money?

jkarolyi · 10-17-2006, 08:20 PM

I get these spam emails occasionally pumping a stock of some company in Mamasia trying to "exploit the synergies between end users and utopia seekers" or something of the like. It's always "ready to burst off the charts", and usually priced at $.02954 cents a share or so.

We all know about the pump and dump spam mails, but are these real companies that are offering stock sales? Who makes money off these penny stocks?

I looked up their stocks on eTrade and sure enough you can buy them, so they must have some sort of legitimacy.

Thanks in advance for satisfying my curiousity.

widebody911 · widebody911's Garage

My guess is the spammer takes a position in the stock, spams the hell out of it, and the cashes in when the stock soars to .10 a share.

jkarolyi · 10-17-2006, 08:36 PM

Yeah, but who lists these junk stocks to begin with? And who would buy a stock based on a spam email?

Moneyguy1 · 10-17-2006, 10:04 PM

There were "local" stockbrokers in many Cities that hawked these stocks. More recent rules and regulations have cut into their business. The idea was to hype up the stock, watch it go up multiples (maybe from $.25 to @.75 a share), then dump a whole lot of it. Instant wealth. Unless you were an "insider", you would, in all likelyhood lose your fillings. Now the internet has replaced these guys. THey own scads of XYZ they bought for, say, a dime a share. They talk it up and it rises to $.20. They double their money while the stock they unload depresses the value back to a dime or less.

BEtter to find yourself a nice mutual fund (no load of course), invest on a regular basis, dollar average over the long run and don't worry. A good rule to follow is never gamble in volatile issues more than you can afford to lose.

Nathans_Dad · Nathans_Dad's Garage

Penny stocks are extremely risky. I personally never have owned a penny stock, the lowest price I have paid for a stock was $4.50. Penny stocks attract people with dreams of hitting it big on one shot. These are the same folks that go to Vegas and put $5k down on black with one spin.

The pump and dump is the rule of the day on penny stocks, exactly as moneyguy says above. The scheme is repeated over and over. Every once in a blue moon you will truly happen on a low priced stock that will make someone a bunch of money, but that is pretty rare.

My advice is press that delete button in your e-mail window ASAP.

jkarolyi · 10-18-2006, 06:28 AM

So is there any "substance" behind these stocks or are they strictly a gambling scheme? Hard to believe this is legal if the companies are just worthless shells.

Don't worry, not going to invest a penny in these pennies.

Nathans_Dad · Nathans_Dad's Garage

The answer is it depends. Some penny stocks are the remains of once profitable companies that were delisted for one reason or another and are trying to rebound. Some of them are small start up companies that may actually have a future (these are a minority). Most are companies that are all hype and no substance or companies waiting to go bankrupt. I know a guy at work that dabbles in penny stocks, he says he has made some money off them but he also researches the hell out of them and tries to stay away from the scams.

The problem with penny stocks is a low float (the number of shares available to trade) and low volume. You might buy a penny stock at one price and then someone else dumps a bunch of stock on the market and the price falls. Penny's are commonly very volatile and highly risky.