When people are trading penny stocks, they often forget the differences they have to account for with promoted penny stocks. These stocks have unique movement patterns that make them unlike anything else in the trading world. In fact, if you are unprepared for the dangers and opportunities involved in trading these stocks, you are very likely to lose money. It’s important to keep this in mind and understand what a promoted penny stock is.
Essentially, promoted penny stock is any micro cap stock that has been listed as a pick by a popular newsletter. There are varying degrees to which this can happen, but typically any promotion will inflate the market and cause share values to increase in price. This may sound like a good thing at first, but there are some risks associated with it that you have to keep in mind.
Because promoted penny stocks often times get their market momentum from an unnatural source, there is an increased likelihood of a sudden collapse in price after a rally. This is especially true if the stock being promoted is being listed through exaggerated research or bad data in order to inflate share value. It is also true if the stock is being promoted by an unknown third party that has shares of the stock and is looking to sell after the market has been significantly inflated, as is the case with pump and dump scams.
People need to understand that trading a promoted stock can be very profitable. It just needs to be done with extreme care. If you are late to the rally in a promoted penny stock, the best place for you to be is in a short position. The stock is likely to fall in price after a rally occurs because many traders will give up on the stock after it is done being promoted.
The exits from a stock like this typically happen very quickly, so get short if you are late on the arrival. If by some odd means the research on the stock is good, then this may mean a long position could be profitable as well. Take the time to look up the data via a third party before going into the market with an aggressive, long move that could get you in serious trouble.