Who Is Moving the Penny Stock Price? - dummies

Who Is Moving the Penny Stock Price?

By Peter Leeds

The share price of a penny stock company should change based on the expectations shareholders and potential investors have for the operational results. Unfortunately, with lower-priced, thinly traded penny stocks, other players are often at work.

As a penny stock investor, you need to understand the individuals who may be influencing the price of a stock. By knowing who is pushing the share prices, you gain a clear idea of how much to trust their influence and have a good idea of how long their promotion or pump-and-dump scheme is going to last.

Penny stock promoters

Individuals who profit by artificially manipulating the prices of penny stocks are known as promoters. They employ numerous unethical tactics, such as misleading information or aggressive spam campaigns, to push thinly traded shares into higher prices, and they profit as they sell millions of shares of the near-worthless company to all the naive buyers.

The activity of promoting a penny stock and then selling shares just before the promotion ends, is know as a pump and dump. Promoters drive stock in near-bankrupt corporations to foolish valuations and then sell their shares. The promotion ends, the stock collapses, costing everyone except the promoter.

Promoters are the main cause of penny stocks getting a bad name, and their activities are very costly to their victims. Because the very act of promoting a very low quality penny stock is devoid of integrity, there are few limits to the degree to which they will take the pump and dump.

Penny stock investor or public relations

Individuals or firms involved in investor relations (IR) can have a legitimate place in the world of penny stocks. In order to get noticed, many companies hire an IR firm to help spread their message in hopes of enticing shareholders, which should potentially increase the share price.

Mainly through press releases, but also via industry conferences, online information, or one-on-one discussions, IR or public relations folks explain all the good things about a company and talk about how it will grow and expand.

Keep in mind that a company hires an IR firm to cast the penny stock in the best light possible, and it usually measures success by the increase in the stock’s price. So although IR firms are more professional and honest than promoters, they still have an interest in presenting the most optimistic case.

There are many degrees of IR firms, and while some are very straightforward and honest, others can be very aggressive in talking up a company.

Take a look at other stocks an IR firm has represented in the past, and peruse the press releases they published about those companies, to get an idea of their balance between honesty and professionalism.

Many investors question the value of companies hiring investor relations firms to help drive up share prices. While stocks do sometimes rise during a period when companies are covered by an IR firm, there are just as many instances of the exact opposite result. Considering the cost associated with retaining professional IR assistance, its value is debatable for penny stock companies already short on cash.

The penny stock touter

A touter is anyone who talks up or recommends a penny stock. They could be bloggers, write a stock-picking newsletter, or just be folks who talk about their investments at the office water cooler.

Usually they have good intentions but know just enough to get themselves and anyone who follows their opinion into trouble. Touters are very often wrong in their picks or opinions, so they increase the appearance of being correct by speaking louder, touting more often, or citing specifics, which they believe will support their position.

For every touter who thinks shares in a specific company are going higher, there’s another touter who thinks they are going lower. So should you ignore or discount these opinions? Stick to reliable and professional sources that earn your trust over time, rather than follow the assertions of some touter just because they sound convincing.

The penny stock advisor

Investment advisors and full service stockbrokers often suggest specific stocks to their clients. Although they tend to shy away from penny stocks in general, sometimes they may suggest specific penny stocks for purchase.

If the customer is interested in increasing the risk and reward portion of his portfolio, the advisor may suggest certain low-priced shares. In addition, if a financial professional has a very optimistic outlook for a specific penny stock, he may want to share that company with his clientele.

The impact of financial advisors on the price of penny stocks is usually insignificant because they rarely suggest the shares to their network. However, because the purchasing power of their clientele is often very high, when brokers do recommend a penny stock, the influence on the share price of penny stock can be significant.