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Wednesday, November 22, 2006

Understanding Manipulation

Remember that we have talked about the fact that all brokers in penny stocks are not holding your hand through the process? Some will dabble with what is called penny stock manipulation. And, it is just what it sounds like it is.

Manipulation happens when there is a bad broker in the mix. Here’s a basic mix of what happens in this case.

· There is only a few or even just one market maker involved. The market maker purchases a large amount of penny stocks for just about nothing.

· He then creates a market of his own by stirring up sales. He will literally encourage others to purchase the stocks based on either fabrications or simply exaggerations of what the stock will actually do. Most of the time, these things are unfounded.

· He sells all of his penny stock sales to those investors that have fallen for his sales hype leaving him with a nice penny to call his own of course.

· Since there is so much buying of the stock, the price and demand for the stock rises. This allows for the stock to do very well, very quickly, turning a profit.

· Yet, when the stock does not have any additional buyers, which is likely to happen quickly, the stock will bottom out or simply fall through leaving everyone with a stock that has nothing to it.

In some cases, the market maker will then purchase up the stocks and do the same process over to other penny stock investors. The end result is that those that are holding the penny stocks can sell them back with no likely possibility of breaking even or they have nothing left.

This can be quite frustrating to the stock holder and without even knowing it they have been taken for a ride.


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