Penny Stocks
Never invest in penny stocks, not even as speculative bets. Not even small amounts of money. It is your moral responsibility besides being a high risk for your hard earned money and I will explain exactly that in this blog. Penny stocks are active especially during euphoric bull markets and they tend to suck in lot of unaware novice investors, so now is a good time to become aware of it.
Promoter Investor Operator
Most penny stocks are paper companies and are trading for pennies because the market already knows about its worthlessness. Unfortunately there are three participants who keep the penny trading alive. One side you have the promoters who list these junk companies to raise money from the market and their only intention is to pump and dump these stocks in the market as many times as possible before it meets its ultimate fate of getting suspended or wound up. On the other side are novice investors with "One night millionaire" dreams. These investors start with small amounts of money in the stock market and hence their only chance to make it big is to invest in companies that are trading for pennies and have the potential to give multi-fold returns. All they need is a convincing story and this is where the third player comes into picture and they are called the operators. They create these "dream come true" stories about the penny stocks they are operating and provide it to you for free through multiple channels like blogs (not this one :)), emails, message boards, etc.
Obviously you have little money to invest and hence you value free advice and since you have heard the hidden gem stories about these stocks from multiple sources, you are thoroughly convinced about it by now. So there you go, let's invest a small amount and see how it goes. Well the operators are playing a larger game than you are and they want more money from you, hence they keep feeding you with fancier stories about the latest developments in the counter and also jack up the stock using money provided by promoters and other parties with vested interests to show you that their recommendation is actually working. Look the price is going up and I just told you the story behind it, what more proof do you want?
Overnight Millionaire Calculations
Now you are a bit more comfortable with your penny investment and you start doing the calculations. I bought a thousand for Re 1 and if it goes up ten times as the operator told me, I will get ten thousand, but that's not enough. If I invest ten thousand I will get one lakh and that is also hardly life changing. If I invest a hundred thousand I will get a million and then I can buy my dream home. So lets go aggressive on this one. Well my friend, have you seen a fly stuck in a spider net? yes, that's you and it's gonna sting like hell before you come to terms with it. It's easy to put money in penny stocks but not that easy to take it out. The price movement in these stocks are completely controlled by the operators and they know how to keep you from getting out.
What is SEBI doing?
Ideally SEBI should identify these companies and suspend them from trading. They do, from time to time but its not that easy for them because they have to do it following the legal course which requires undeniable proof which takes several years of tracking. Lot of penny promoters and operators are quiet influential and that makes things even more complex. Anyways it's our money so it is a good idea not to be dependent on others for protecting it.
How to identify penny stocks?
Easy, stocks trading for penny valuations are penny stocks :) few paisa to few rupees. These stocks usually have negligible promoter holding, from 0 to less than 30% . They do lot of announcements always including the latest buzzwords like renewable energy, e-commerce, real estate. The announcements will never have tangible numbers, it will be mostly be forward looking like planning to make a big foray in the e-retail domain. There is frequent change in the name of the company, frequent switch from one business type to another which are totally unrelated, frequent change in auditors of the company, frequent resignation by the company CFO and change in board of directors, frequent corporate actions like merger/de-merger of unrelated entities, capital reduction, etc. The only motivation behind these is to keep the company name is news and attract as many novice investors as possible. They have fancy websites but not professional looking, you will spot the difference very easily. You will see lot of stock gurus feeding you continuously about these stocks on various forums. Their results and balance sheet will be either very consistent or all over the place without any justification. Just like fake websites, fabricated accounts are easy to identify. Their stocks will be ill-liquid and trade erratic, mostly moving in upper and lower circuits which is a clear signal of pump and dump. Frankly speaking it is very obvious and easy to spot them, it is just our greed that blinds our vision.
What should I do?
What if I can outsmart the operators? I invest some money and let the operators pump it up. Now that I know how to identify penny stocks and how they work, I can dump it before the operators do so. I can make a killing, isn't it? Even if you could do so, don't. It's blood money. By trading penny stocks, you are encouraging such companies to exist. Simply ignore these companies and they will die a slow death. You would have proudly contributed to their elimination from the stock exchange by ignoring them and not giving them the life source of speculative money. By doing so you are protecting your fellow novice investors from falling in the trap of these operators and making the stock exchange a safe and clean place. So make it a thumb rule, not to invest in penny stocks and be a penny slayer in the stock market. It's a great thing to be heroic at what you do, isn't it?
Any other advantages?
By eliminating the penny companies from your tracking list you would be making a better use of your time focusing on legitimate business and increasing your chances of finding Stock-A multi-fold times, ultimately increasing your chances of success in investment by a great deal and that in itself should be motivating enough for you to ignore penny stocks. If it is not, then clearly something is going wrong. At-least remember the "Dilwale Dulhaniya Le Jayenge" dialogue ..
"Agar tum galat raaste par chaloge ... toh ho sakta hai shuruvat mein tumhe bahut kamyabi mile, bahut khushiya mile ... magar anth mein tumhari haar hogi ... aur agar sahi raaste par chaloge ... toh bhale hi shuruvat mein tumhe kadam kadam par thokarein mile, musibaton ka samna karna pade, pareshani ho ... magar anth mein hamesha jeet hogi"
See our movies teach us a lot of good things and what a great hit this movie was. We want to be like that, don't we?
Never invest in penny stocks, not even as speculative bets. Not even small amounts of money. It is your moral responsibility besides being a high risk for your hard earned money and I will explain exactly that in this blog. Penny stocks are active especially during euphoric bull markets and they tend to suck in lot of unaware novice investors, so now is a good time to become aware of it.
Promoter Investor Operator
Most penny stocks are paper companies and are trading for pennies because the market already knows about its worthlessness. Unfortunately there are three participants who keep the penny trading alive. One side you have the promoters who list these junk companies to raise money from the market and their only intention is to pump and dump these stocks in the market as many times as possible before it meets its ultimate fate of getting suspended or wound up. On the other side are novice investors with "One night millionaire" dreams. These investors start with small amounts of money in the stock market and hence their only chance to make it big is to invest in companies that are trading for pennies and have the potential to give multi-fold returns. All they need is a convincing story and this is where the third player comes into picture and they are called the operators. They create these "dream come true" stories about the penny stocks they are operating and provide it to you for free through multiple channels like blogs (not this one :)), emails, message boards, etc.
Obviously you have little money to invest and hence you value free advice and since you have heard the hidden gem stories about these stocks from multiple sources, you are thoroughly convinced about it by now. So there you go, let's invest a small amount and see how it goes. Well the operators are playing a larger game than you are and they want more money from you, hence they keep feeding you with fancier stories about the latest developments in the counter and also jack up the stock using money provided by promoters and other parties with vested interests to show you that their recommendation is actually working. Look the price is going up and I just told you the story behind it, what more proof do you want?
Overnight Millionaire Calculations
Now you are a bit more comfortable with your penny investment and you start doing the calculations. I bought a thousand for Re 1 and if it goes up ten times as the operator told me, I will get ten thousand, but that's not enough. If I invest ten thousand I will get one lakh and that is also hardly life changing. If I invest a hundred thousand I will get a million and then I can buy my dream home. So lets go aggressive on this one. Well my friend, have you seen a fly stuck in a spider net? yes, that's you and it's gonna sting like hell before you come to terms with it. It's easy to put money in penny stocks but not that easy to take it out. The price movement in these stocks are completely controlled by the operators and they know how to keep you from getting out.
What is SEBI doing?
Ideally SEBI should identify these companies and suspend them from trading. They do, from time to time but its not that easy for them because they have to do it following the legal course which requires undeniable proof which takes several years of tracking. Lot of penny promoters and operators are quiet influential and that makes things even more complex. Anyways it's our money so it is a good idea not to be dependent on others for protecting it.
How to identify penny stocks?
Easy, stocks trading for penny valuations are penny stocks :) few paisa to few rupees. These stocks usually have negligible promoter holding, from 0 to less than 30% . They do lot of announcements always including the latest buzzwords like renewable energy, e-commerce, real estate. The announcements will never have tangible numbers, it will be mostly be forward looking like planning to make a big foray in the e-retail domain. There is frequent change in the name of the company, frequent switch from one business type to another which are totally unrelated, frequent change in auditors of the company, frequent resignation by the company CFO and change in board of directors, frequent corporate actions like merger/de-merger of unrelated entities, capital reduction, etc. The only motivation behind these is to keep the company name is news and attract as many novice investors as possible. They have fancy websites but not professional looking, you will spot the difference very easily. You will see lot of stock gurus feeding you continuously about these stocks on various forums. Their results and balance sheet will be either very consistent or all over the place without any justification. Just like fake websites, fabricated accounts are easy to identify. Their stocks will be ill-liquid and trade erratic, mostly moving in upper and lower circuits which is a clear signal of pump and dump. Frankly speaking it is very obvious and easy to spot them, it is just our greed that blinds our vision.
What should I do?
What if I can outsmart the operators? I invest some money and let the operators pump it up. Now that I know how to identify penny stocks and how they work, I can dump it before the operators do so. I can make a killing, isn't it? Even if you could do so, don't. It's blood money. By trading penny stocks, you are encouraging such companies to exist. Simply ignore these companies and they will die a slow death. You would have proudly contributed to their elimination from the stock exchange by ignoring them and not giving them the life source of speculative money. By doing so you are protecting your fellow novice investors from falling in the trap of these operators and making the stock exchange a safe and clean place. So make it a thumb rule, not to invest in penny stocks and be a penny slayer in the stock market. It's a great thing to be heroic at what you do, isn't it?
Any other advantages?
By eliminating the penny companies from your tracking list you would be making a better use of your time focusing on legitimate business and increasing your chances of finding Stock-A multi-fold times, ultimately increasing your chances of success in investment by a great deal and that in itself should be motivating enough for you to ignore penny stocks. If it is not, then clearly something is going wrong. At-least remember the "Dilwale Dulhaniya Le Jayenge" dialogue ..
"Agar tum galat raaste par chaloge ... toh ho sakta hai shuruvat mein tumhe bahut kamyabi mile, bahut khushiya mile ... magar anth mein tumhari haar hogi ... aur agar sahi raaste par chaloge ... toh bhale hi shuruvat mein tumhe kadam kadam par thokarein mile, musibaton ka samna karna pade, pareshani ho ... magar anth mein hamesha jeet hogi"
See our movies teach us a lot of good things and what a great hit this movie was. We want to be like that, don't we?
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