Researching and Tips for Trading Penny Shares

Q.: Do you have any tips in picking penny shares?

I'm considering putting in £250 into each of a number of penny shares.

A: Penny shares are priced that way for a reason. Of course, there's the 1% that are incredible value for money. In any case why penny shares? You only get a Poseidon or Polly Peck come along once every 15 years or so! Buying 8,000 shares at 0.03 is the same as buying 65 shares at 3.84 if they both rise by 3%. And by the time you've read about the 'tip' you can bet everyone in the 'know' has already piled in.

  1. Get yourself signed up to Money Morning, the daily investment email from MoneyWeek magazine.
  2. Await emails offering you the chance to sign up to various Hot PennyShare tip newsletters such as The Penny Sleuth...
  3. Decide if you want to part with some cash for these services.

If you're considering £250 for each stock then you might well see it as worthwhile to pay for some advice. The only thing about share tip sheets is this. If they are so accurate what are the editors doing 'working' for a living?

I have operated in the City for nearly 20 years and never met anyone honest or professionally qualified who operates in the penny share sector. Most are living well away from London and operate through virtual offices to add credibility to their story.

If you have to look at penny shares because you have so much money and you need to give it away to shysters rather than a charity then the key is to always ignore the story and look at the people behind it. There will always be some retired monkey from the industry which is being ramped as the story on the board, he is usually a drunk or a divorcee who has run out of time to earn money in his field so takes the shilling of the bucket shop as he never got round to sorting out a pension and is broke. There will then be a 'financier' on the board. This will be someone renown for floggins shells to muppets at massively inflated prices and will usually have, in fact, always have, strong connections to the specialist brokerages who sell the stock. Sometimes these people will use a front man as appears to be the case in this scenario.

Finally, once you have the Board in place you need a story that will give morons a hard on. This is usually to do with gold or oil. For a brief period at the turn of the century it was technology. Once that is all in place you need to lodge your key stock holding in offshore trusts and companies that themselves are made to look like the assets of people in the know on the ground, so if the hole in the ground that is to be sold is in Nigeria then the offshore holdings will be made to look like they belong to local government or key people.

Then you carry out a pre-IPO to raise some fun money and keep the story going and finance the reversal into a AIM listed shell you already own ( a nice double earner) or just to list on AIM. At that point you carry out a reem of rights issues to raise further capital from mugs while your friendly NOMAD and other 'specialist brokers' sell the stock to fools. The specialist brokers will normally have been sold a line of stock at a few pence, then start selling it off at a multiple of that trippling their money. They will also be responsible for preventing any of their clients from selling out of the stock and protect the share price which the market makers seem content to hold artificially high.

When all the stock is out and the founders have made their pie then the stock generally dwindles away on lack of news flow and in turn becomes just an empty shell ready to take part in the next reversal but this time with a block of retail shareholders desperate to unwittingly help the founders by ramping their stock up on bulletin boards and in the pub.

Once you start looking into who the directors are of the brokers involved, who the lawyers used are and who the directors of the shells are you almost instantly appreciate that this end of the market is simply one massive web of connected individuals who have been doing this for 20 odd years. Many now live outside of the UK, but all are very wealthy.

£250 after commissions on quality stocks won't get you far and on penny shares once you factor in the spread and the fact that almost everyone involved in that company is a spiv will leave you even worse off.

Penny shares always have been for mugs and always will be, but they keep the bulletin boards alive with traffic and thus ad sales, they keep numerous brokers in revenue and all small market makers in business, they are the fuel under the retail market in the UK outside of CFDs and spread betting...

But please don't let me put you off -:) More info on Penny Shares and Spread Betting AIM Stocks and Penny Stocks info here.

 ...Continues here - Researching Stocks and Shares to Short

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