Penny Stock Newsletters - dummies

By Peter Leeds

Penny stock newsletters can be a great way to get ideas and guidance on low-priced shares. These resources are almost always provided online, whether through email alerts or a website, although a few send out printed newsletters or faxes.

In most cases, the service or website simply asks for your email address, and then they start bombarding you with frequent “hot tips” about penny stocks they claim are going to explode in value. Unfortunately, the free newsletters usually have hidden motivations, and the majority of their selections seem to fare very poorly.

Paid newsletters, on the other hand, have a responsibility to provide sound investment opinions and maintain their subscriber base by making legitimate and profitable selections for their readers.

It sure seems as though there are more newsletters specifically about penny stocks than any other type of investment. The number of newsletters available means that you have a great deal to choose from, but you should also recognize the equally significant risks.

Don’t follow the advice of any penny stock newsletter until you understand the difference between the two types you may encounter; free and fee based. The difference between the two types is significant.

Free newsletters

Free penny stock newsletters make up the vast majority of publications about low-priced shares. As the name implies, you can access them at no cost; instead, all you need to do to receive their free alerts about stocks they claim will explode in price is to provide them with your email address.

Generally, free newsletters and stock-alert promoters run websites to drive pump-and-dump schemes. In such schemes, price manipulators buy millions of shares in the company for pennies, tell their subscribers that this company is the next big thing, and then sell their holdings as foolish investors buy the stock for hundreds of times more than it is worth.

As soon as the promoter unloads his shares on the market, he stops touting the investment, and the share price collapses far below what his subscribers paid. Most investors who get burned by these pump-and-dumps never took the time to ask why these free websites bothered to bring the penny stocks to their subscriber’s attention in the first place.

Even though not technically illegal (as long as the pump-and-dump artist mentions his ownership of the shares, or his cash compensation, deep into a fine print disclaimer), pump-and-dump practices are highly immoral and very damaging to unsuspecting investors.

Subscription newsletters

To gain access to subscription-based newsletters, you must pay a fee. In exchange for that fee, however, you generally get much more reliable and effective guidance from a service that’s in the business of profiling high-quality penny stocks. Because fee-based newsletters earn their revenue from subscriptions rather than manipulative pricing schemes, they’re motivated to do proper analysis and uncover picks that perform well.

If you follow a penny stock newsletter, wait to see if its picks are going up in price before you give it your full trust. Treat its suggestions only as ideas, to which you can then apply your own due diligence. Always proceed with the knowledge that every buy and sell decision you make is fully your choice and responsibility.

Be wary of paid promotions in any newsletter — whether free or subscription. Many subscription newsletters receive compensation from the penny stocks they profile, and what appears to be a legitimate newsletter is actually little more than a cleverly disguised paid advertisement. Read the disclaimer that comes with any report, even if it is located in fine print and seven paragraphs deep on another page. Paid promoters are very good at hiding the fact that they receive money to cast the penny stock in the best light. The majority of publications have significant vested interests, and therefore, you should not trust what they tell you.