| Chapter 6: More Terms
To Know About Penny Stocks
Before we go any further, there are some additional terms as well as
points to bring up that can help to clarify things that you are likely
to see in the public buying forums for penny stocks. Understanding them
will help you to stay educated as well as safer when it comes to
investing in penny stocks wisely.
What Are Market Makers?
One term that you may come across from time to time is that of market
makers. Now, you are likely to hear both good things as well as a few
bad things when it comes to these guys. The question is, what is it that
they do?
A market maker is a broker that buys and sells penny stocks at 100
shares per transaction. While this may not seem like a whole lot, it can
be a system that provides benefits to those that are dabbling into the
penny stock markets. Why is that? It’s simple.
The market marker system allows for market makers to purchase and sell
shares at various prices. They do in fact set the price for the shares
and this can help to keep purchases that are going back and forth
increasing in value. In other words, each time that they buy or sell in
that amount per purchase, they are able to set the tone for the penny
stock, helping to increase the stock’s benefit to you, the share holder.
Of course, it is good to have several money markets into this process as
the more trading there is, the better the penny stock will fair as with
any type of stock out there.
To learn the names of the actual market makers that are dealing with the
penny stock that you are interested in, simply consult the pink sheets.
They are generally listed there for your use.
Understanding Manipulation
Remember that we have talked about the fact that all brokers in penny
stocks are not holding your hand through the process? Some will dabble
with what is called penny stock manipulation. And, it is just what it
sounds like it is.
Manipulation happens when there is a bad broker in the mix. Here’s a
basic mix of what happens in this case.
• There is only a few or even just one market maker involved. The market
maker purchases a large amount of penny stocks for just about nothing.
• He then creates a market of his own by stirring up sales. He will
literally encourage others to purchase the stocks based on either
fabrications or simply exaggerations of what the stock will actually do.
Most of the time, these things are unfounded.
• He sells all of his penny stock sales to those investors that have
fallen for his sales hype leaving him with a nice penny to call his own
of course.
• Since there is so much buying of the stock, the price and demand for
the stock rises. This allows for the stock to do very well, very
quickly, turning a profit.
• Yet, when the stock does not have any additional buyers, which is
likely to happen quickly, the stock will bottom out or simply fall
through leaving everyone with a stock that has nothing to it.
In some cases, the market maker will then purchase up the stocks and do
the same process over to other penny stock investors. The end result is
that those that are holding the penny stocks can sell them back with no
likely possibility of breaking even or they have nothing left.
This can be quite frustrating to the stock holder and without even
knowing it they have been taken for a ride.
What Are Initial Public Offerings?
Initial public offerings are in fact the first offerings of the penny
stock to the general public. A company that is looking for investment
dollars will begin the process of putting their company out there. Just
like any stock market, it is important for new stocks to hit the penny
stock market regularly, to keep it fresh with new competition and
opportunities for those that are looking to invest to grow.
Remember, just because a penny stock company is brand new does not mean
that it is not worthwhile. In fact, if no one investing in the stocks
for small companies, there are plenty of huge corporations today that
simply would not be where they are.
The trick is to know which to invest in and as we explained, doing your
homework can make that process go much faster and easier for you.
What’s The Difference?
Nevertheless, there are many things that you need to take into
consideration. One of them is the difference in the penny stocks that we
have been talking about, which are those that are on the secondary
market as well as those that are on the Initial Public Offering market.
There is a difference.
What you should realize, then, is what makes the difference. When a
company decides that it will begin to offer its shares on the penny
stock market, the first thing it needs to do is to seek out the
Securities Division. In doing that, it will need to go through some
pretty heavy workouts by the Division.
The goal of the guidelines offered by the Securities Division is that of
providing for some information to the general public about the company
and the risk involved.
If you remember, we talked about how with most penny stocks, the markets
do not have strict restrictions on what and who can be sold on these
markets. Therefore, it can be tricky for the average person to determine
if the penny stock they are considering investing in is a good idea or
not. But, with Initial Public Offerings, there is a difference.
Since this is the first time that the stock is on the market, the IPO,
or Initial Public Offering, will be done will have many more
restrictions applied to it. The Division is looking to insure that the
penny stocks out there are actually offering something that is fair to
the investor, something that is just to the investor and that it is
equitable to the investor.
There is no way to know for sure if in fact all of the companies that go
through the IPO are actually high quality companies, it is harder to get
through a bad company or a scam in this manner. These guidelines do help
to keep fraudulent offerings out of the picture.
They will not allow those companies that are found to be fraudulent or
those that are not legitimate in some other manner will not be provided
with registration and therefore can not be sold as penny stocks.
Therefore, those that are investing in Initial Public Offerings will
have less of a chance of getting the bad guy.
States Aren’t All The Same!
Now, there is something else that you need to take into consideration
here.
That is that there are different laws that apply to different states.
The bottom line is that there are plenty of opportunities to find the
best companies out there but the rules and guidelines that apply to
penny stocks in one state do not necessarily have the same guidelines in
another state.
You can learn more about your specific state’s guidelines by contacting
and working with the Securities Division of your state. Most state
websites will provide you with a link to this division’s website. Make
sure you take some time to check it out.
Secondary Market Laws
In addition, you should realize that penny stocks that are on the
secondary market do not necessarily have the same guidelines or rules
applied to them. In fact, there are big differences in which secondary
markets in penny stocks can be quite tricky.
The requirements are usually less stringent and there are likely to be
fewer laws governing those investments. Therefore, more attention to
detail should be paid here.
Now that you have a good idea of what some of the additional terms that
you will be seeing throughout penny stock investing are, you can begin
moving into purchasing and using the information that you have gathered
here.
To Review
But, before you do that, let’s review what we covered here so far.
Be careful with who you are purchasing your penny stocks from. It pays
to take the time to learn not only about the actual stocks but about
your broker too. No matter how nice they seem, you do not want to end up
with someone that is manipulating the stocks to look better than they
are.
It is also important for you to look at the long term history of the
penny stock. A penny stock that is a initial public offering will likely
have more stringent guidelines on it, but that does not mean that it is
100% guaranteed to be something you want to invest in. Instead, do your
own homework.
It pays to invest wisely in educating yourself about market makers as
well. You will learn to notice these things as you go throughout the
process of penny stock investing. What’s more is that you are likely to
be able to make better decisions now that you have a few more things
under your belt.
But, wait, we are not done yet. We want you to head out into the world
of penny stocks with all of the information that you could possibly need
to make a solid decision. Therefore, the following chapters will provide
you with tips, hints, tricks and more information that you have to know
to make it big in penny stocks. |