New York - The traditional definition of penny stocks are stocks that trade at $5 or less. Today, the definition of penny stocks could be expanded to include some of the small or microcap stocks that trade on the Nasdaq's SmallCap Market or pink sheets.
In summary, most of these stocks are companies have hired stock promoters whose sole intent is to drive the price of the stock up while company insiders and the stock promoters themselves sell. They produce newsletter articles and research reports that make the company's prospects looks terrific.
Generally, promoters can get a small stock's price up rather quickly. This increase is then shown to new investors who are amazed at the quick run-up in price. Hence, new investors purchase the stock while the insiders sell. Generally, when they are done selling, they stop finding buyers and the price quickly drops back to its original price before you are able to sell.
There are many other opportunities to make money in the stock market and with much less risk. Unless you are an employee or personal and trusted friends with the owner, we generally recommend that you not invest in MicroCaps regardless of what type of return you are "promised."
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