The vast majority of people who lose money trading penny stocks often do so because they violate some of the basic concepts of penny stock trading. There are definitely some things that you should not be doing because you are exposing your to even greater risks and losses in the first is that is already risky enough in the first place. There are plenty of unscrupulous operators who give penny stocks and penny stock trading a bad name and you will be playing into their hands if you violate some of these don’ts.
What they are doing may be illegal but this is no consolation if they have already pocketed your money. You must also remember that regulators like the SEC do not have the resources or the manpower to chase thousands of small time crooks. This is why you should always resist temptation no matter how attractive it may seem. The best bargains often turns out to be a basket of snakes.
Never follow penny stock tips or reports that are given out for free. A little thought will tell you that these folks are not philanthropists who are doing this out of the goodness of their heart. They have to be making money from somewhere and you can bet that this is going to be at your expense. Very often, they get paid by unscrupulous promoters or operators to hype particular stocks. This is the classic “pump and dump” where they have already accumulated large quantities of a particular penny stock dirt cheap and are looking for suckers on whom the stock can be dumped.
Very often these tipsters or websites will require you to register and provide your e-mail in return for a free newsletter or free pick service. You should never ever give out your e-mail under these circumstances because there’s a good chance that these people are going to sell your e-mail address to third parties for a fee. This leaves you vulnerable to spam and manipulation as they persuade you to buy some worthless penny stock. Once again, they will try and tempt you to become greedy, a temptation that you must always avoid.
Another don’t is to make a conscious decision not to trade on the pink sheets. Because there are no regulatory nor disclosure requirements, it is fair to say that by and large that only the companies who are trying to dodge these requirements [making them exceedingly high risk investment] will choose to list here. There is also no commitment to transparency or keeping investors adequately informed. There are reasonable quality penny stocks to be found on the NYSE or the AMEX who are regulated and governed by the discipline of these exchanges.
Penny stock trading is high risk and dangerous enough on its own and you should not complicate matters further by taking on risks that you do not have to take. There are plenty of scams in these markets and if you choose to swim with the sharks, prepare to end up dead. To be sure, there is money to be made on trading penny stocks but only if you trade with the utmost discipline and discrimination. There is absolutely no substitute for hard homework and extensive due diligence.