⚠️🆘 𝐏𝐞𝐧𝐧𝐲𝐬𝐭𝐨𝐜𝐤 𝐀𝐁𝐂 🆘⚠️
𝑺𝒄𝒉𝒏𝒆𝒍𝒍𝒆𝒓 𝑹𝒆𝒊𝒄𝒉𝒕𝒖𝒎 𝒐𝒅𝒆𝒓 𝒅𝒐𝒄𝒉 𝒔𝒄𝒉𝒏𝒆𝒍𝒍 𝒊𝒏 𝒅𝒆𝒏 𝑨𝒃𝒈𝒓𝒖𝒏𝒅?
I have often read penny stock recommendations on Getquin in the past, whether from users themselves or elsewhere. I was very offended by this, as it affects the seriousness of this platform. I hope that this platform will develop into a good and reputable platform. After all, the potential is there. And anyone who knows me knows that I am a fan of constructive criticism (and not through the "flower")! I would therefore like to write you a guide on how to avoid dubious penny stocks.
This article is about the majority of penny stocks, which have a lot in common, which I will discuss in more detail in a moment. Of course, there are also interesting and reputable companies. However, I would like to explain below how to distinguish the good companies from the many scams.
𝗜. 𝗘𝗿𝘀𝘁𝗲 𝗪𝗮𝗿𝗻𝗵𝗶𝗻𝘄𝗲𝗶𝘀𝗲
Penny stocks are usually shares whose value is in the low cent range. Stock exchanges from less regulated markets, such as Canada, are very popular with dubious penny stocks. Therefore, first pay attention to the ISIN (begins with CA). Of course, this is not necessarily an exclusion criterion, as there are also reputable companies with low market capitalization in Canada. But it is always a first possible indication!
These often Canadian penny stocks often have a "secondary listing" in Germany. With a "secondary listing" in Germany, the companies can quickly access the so-called "stupid German money". After the listing in Germany, the "promotion machine" is switched on.
But one thing at a time....What do we have to look out for in addition to the ISIN, which of course does not define a dubious penny stock, and how can we avoid these penny stocks? I'll show you all that below!
𝗜𝗜. 𝗗𝗲𝗳𝗶𝗻𝗶𝘁𝗶𝗼𝗻 𝘃𝗼𝗻 𝗣𝗲𝗻𝗻𝘆𝘀𝘁𝗼𝗰𝗸𝘀
In the past, all stocks traded below USD 1 were referred to as penny stocks. However, the SEC (U.S. Securities and Exchange Commission) has broadened this definition somewhat. By US definition, all stocks under USD 5 are now penny stocks. These are often not listed on the major stock exchanges but on the OTC market [1].
With these securities, relatively small absolute price movements (e.g. 5 or 10 cents) are sufficient to cause large percentage movements. For this reason, investors are almost magically attracted to penny stocks. This is because they expect quick profits and possibly quick wealth. Aggressive marketing and this psychological effect on private investors often leads to irrational actions.
𝗜𝗜𝗜. 𝗨𝗻𝘁𝗲𝗿𝘀𝗰𝗵𝗲𝗶𝗱𝘂𝗻𝗴 𝗦𝗺𝗮𝗹𝗹 𝗖𝗮𝗽𝘀 𝘃𝘀 𝗣𝗲𝗻𝗻𝘆𝘀𝘁𝗼𝗰𝗸 [𝟱]
Like penny stocks, small caps also have a very low market capitalization. By definition, small caps have a market capitalization of between USD 250 million and USD 2 billion (share price x number of shares). Nevertheless, there are significant differences:
-Small caps can also be traded above > USD 5.
For example, a share with a price of USD 100/share and 8 million outstanding shares can belong to a small cap, as the market capitalization is only USD 800 million.
Brief digression: Don't forget, the market capitalization divided by the profit or turnover results in the P/E ratio or KUV.
-Small caps are also traded on traditional stock exchanges (e.g. NYSE, NASDAQ).
This point is probably the decisive factor. Listing on a major stock exchange, where the relevant requirements have to be met, gives a certain degree of respectability.
There are also companies that are traded in the penny stock segment but have a market capitalization that exceeds that of a small cap:
Alumina: the world's largest producer of aluminum and bauxite - market capitalization approx. USD 2.91 billion
The seriousness of the company is therefore already somewhat determined by the definition criteria. The stock exchange trading place is particularly important to me.
𝗜𝗩. 𝗢𝗧𝗖 𝗠𝗮𝗿𝗸𝘁 / 𝗕ö𝗿𝘀𝗲𝗻 𝗺𝗶𝘁 𝗴𝗲𝗿𝗶𝗻𝗴𝗲𝗿 𝗥𝗮𝗴𝘂𝗹𝗮𝘁𝗼𝗿𝗶𝗸
As mentioned, penny stocks are mostly traded on the OTC market and not on major stock exchanges such as the NASDAQ or NYSE.
The OTC market can be defined as follows:
"Over-the-counter trading of stocks or bonds between financial market participants. The OTC market or over-the-counter market is generally understood to mean interbank trading. Trading takes place outside the responsibility of a stock exchange, but is subject to the applicable legal provisions for securities trading." [2] Nevertheless, it is less regulated and much more illiquid than large stock exchanges.
Examples:
-NASDAQ OTC
-LS Exchange
Due to the lower requirements and regulations, the
-CSE (Canadian Security Exchange) and
-NEO Exchange (Canadian Stock Exchange in Toronto)
should also be mentioned.
Both are not OTC trading venues. However, due to less regulation, they are also often used by penny stocks to seek a secondary listing on the OTC market for greater reach/tradability. This list is not exhaustive.
Overview of Canadian companies traded on the US OTC market:
https://stockmarketmba.com/canadiancompaniesthattradeotc.php
So why are many penny stocks on said trading venues? The reason is relatively simple. Large and renowned stock exchanges have demanding disclosure requirements for companies as well as for quarterly reports and balance sheets in order to inform and protect investors. Most penny stocks can hardly meet these requirements and therefore switch to less regulated trading venues. [3]
Listing requirements of the NASDAQ:
General Standard:
"The General Standard is a segment of the EU-regulated market. The minimum legal requirements of the Regulated Market apply to the companies in this segment." [6] Regulation is based on the Stock Exchange Act, the Stock Exchange Admission Ordinance, the Securities Prospectus Act and the Stock Exchange Rules. The General Standard is primarily for small and medium-sized companies.
https://www.lynxbroker.de/boerse/boerse-kurse/boerseninfo/boersenlexikon/general-standard/
Prime Standard:
"The Prime Standard is the segment with the highest requirements on the Frankfurt Stock Exchange (FWB®) and throughout Europe. The applicable follow-up obligations go beyond those of the General Standard and must be fulfilled in addition to these. The extended post-admission obligations of the Prime Standard are characterized by a higher degree of transparency requirements, including, for example, the requirement that these must also be fulfilled in English." [7]
You can find the factsheets of the general and prime standard as well as further information under the following link:
https://www.deutsche-boerse-cash-market.com/scale/
𝗩. 𝗙𝗿𝗲𝗾𝘂𝗲𝗻𝘇
The trading volume of penny stocks is usually very low. Of course, this also means that small purchases and sales can lead to large price movements. However, this often has nothing to do with the company's great strategy but is the result of pure speculation and market manipulation. Exceptions prove the rule, of course.
𝗩𝗜. 𝗨𝗻𝘀𝗲𝗿𝗶ö𝘀𝗲 𝗣𝘂𝘀𝗵𝗲𝗿
A common method of pushing dubious penny stocks is so-called "scalping", in which targeted advertising campaigns are used to enable the players to sell their own holdings of a company's shares at a profit. The pushers, or simply fraudsters, recommend the penny stocks they hold for purchase via stock market letters, advertising appeals and spam emails [4]. The pushers often receive these shares as payment from the company. They have therefore never spent any money on them themselves. Their sole aim is to find buyers for their own junk. These advertising campaigns start after a German dual listing, as mentioned above. Investors from the DACH region are targeted, which brings us back to the so-called "stupid German money". Because advertising campaigns often run exclusively via these regions.
The articles written by these fraudsters are usually very sensational and full of promises. Here are two small examples to give you an idea of what I mean:
The headline refers directly to a price bomb. Price potentials are also often advertised directly. These are all immediate signs of dubious pushers!
Examples of dubious pushers:
Helmut Pollinger - Bullvestor
Rainer Hahn - MSM GmbH (swissinvestor.de)
Rich TV Live - youtube channel
Another example in which Bafin has also intervened:
https://aktienblogger.com/2021/01/04/aktienpusher-unseriose-kaufempfehlungen/
However, I am sure that there are other pushers that you are welcome to mention in the comments (better, you should!).
𝗩𝗜𝗜. 𝗗𝗶𝘀𝗰𝗶𝗹𝗮𝗶𝗺𝗲𝗿
At the end of the analysis of such pushers, there is usually a so-called conflict of interest in the disclaimer. Here is an example from the article above on Taat:
The publisher and responsible authors hereby declare that the following conflicts of interest exist with regard to the company discussed in this publication at the time of publication:
- I. Authors and the publisher as well as related Consultants and principals hold shares at the time of publication and reserve the right to sell them at any time and without notice or to take new positions in the discussed company. or enter into new positions in the stock discussed.
- II.t the time of publication, the authors and the publisher and clients, as well as related consultants, maintain a consulting mandate with the company discussed and receive a fee for this. Authors and the publisher know that other stock market letters, media or research firms are discussing the share during the same period. This results in symmetrical information and opinion generation during this period. This bullVestor publication is expressly not a financial analysis, but a publication of a very clear and unambiguous advertising character on behalf of the companies discussed.
My tip: If you find an interesting penny stock, first look for published articles and see if there are any such conflicts of interest. If so, hands off!
After all, why should you buy if the so-called analyst states in the disclaimer that he may sell the stock?
𝗩𝗜𝗜𝗜𝗜. 𝗗𝗶𝗲 𝗨𝗻𝘁𝗲𝗿𝗻𝗲𝗵𝗺𝗲𝗻𝘀𝘀𝘁𝗼𝗿𝘆
The story or business model of the penny stock complements all these indications. Because this story usually sounds so great that you immediately assume a game changer with disruptive potential. However, some of these stories are very "creative".
-Taat: Cigarette without tobacco and nicotine
-Rainforest Resources: Under the motto "Save the rainforest" - acquisition of rainforest land to obtain CO2 certificates, which are then sold.
Of course, this all sounds great, but it should make you suspicious.
𝗜𝗫. 𝗔𝗸𝘁𝗶𝗼𝗻ä𝗿𝘀𝘀𝘁𝗿𝘂𝗸𝘁𝘂𝗿
Also take a look at the shareholder structure! If the group's management hardly owns any shares, this is also a first sign that there is little internal trust in the company. In addition, it is always good to see when large institutional investors have a stake in the company. So why isn't a large tobacco group invested in Taat if the business model is supposed to be so disruptive? I think BAT (British American Tobacco) and co. certainly have their reasons!
𝗫. 𝗛𝗼𝗺𝗲𝗽𝗮𝗴𝗲 𝗱𝗲𝘀 𝗨𝗻𝘁𝗲𝗿𝗻𝗲𝗵𝗺𝗲𝗻𝘀
Investor Relations: Does the company have an investor relations section? In principle, every listed and reputable company has an investor relations section where press releases or quarterly and annual reports are published. Further information such as key figures, share price developments, corporate goals and strategy as well as the stock exchange on which the company is listed are also published. In short, everything that could be of interest to an investor and ensure transparency.
Example Investors Relations of UPM Kymmene:
https://www.upm.com/investors/
UPM stock exchange:
https://www.upm.com/investors/share-information/share-trading/
If you can't even find a homepage for the company, this is of course also a cause for concern!
𝗫𝗜. 𝗕𝗮𝗳𝗶𝗻
Bafin also issues warnings regarding serious investments:
The Bafin brochure contains much of what I have also summarized here:
𝗫𝗜𝗜. Ü𝗯𝗲𝗿𝘀𝗶𝗰𝗵𝘁 𝘇𝘂 𝗱𝗲𝗻 𝗺𝗲𝗶𝘀𝘁𝗱𝗶𝘀𝗸𝘂𝘁𝗶𝗲𝗿𝘁𝗲𝗻 𝗣𝗲𝗻𝗻𝘆𝘀𝘁𝗼𝗰𝗸𝘀 𝗮𝘂𝗳 𝘄𝗮𝗹𝗹𝘀𝘁𝗿𝗲𝗲𝘁:𝗼𝗻𝗹𝗶𝗻𝗲
https://www.wallstreet-online.de/statistik/top-pennystocks-aktien-meistdiskutiert
𝗫𝗜𝗜𝗜. 𝗖𝗵𝗲𝗰𝗸𝗹𝗶𝘀𝘁𝗲
Google the company's news.
Check the disclaimer of the news.
Assess the publisher of the news and its seriousness (sensational headlines / big price promises / other publications by the publisher).
Look through the shareholder structure (how many shares do the founders have / are large institutional investors involved?)
Company homepage - is there an investor relations section? Is there a homepage at all?
Review management and CVs (e.g. LinkedIn) - Are the people serious? Have there been previous cases of fraud and dubious business cooperations?
𝗫𝗜𝗩. 𝗦𝗰𝗵𝗹𝘂𝘀𝘀𝘄𝗼𝗿𝘁
I hope my guide will help you to make the right decisions in future. Ultimately, however, as in most of my posts on company valuation/analysis (see my profile), it is about reducing wrong decisions. Fraudulent actions, far removed from penny stocks, can also occur (see Wirecard). But if you question certain things critically and don't allow yourself to be misled, you will be successful on the stock market in the long term and avoid scams of this kind!
In this context, I would like to draw your attention to the voting for shit stock 2022. Because penny stock scams are also included here:
https://app.getquin.com/activity/GzfzBITHnK?lang=de&utm_source=sharing
Sources:
[1]
https://www.investopedia.com/terms/p/pennystock.asp
[2]
https://boersenlexikon.faz.net/definition/over-the-counter-market/
[3]
https://www.commerzbank.de/investieren/wissen/was-sind-pennystocks/
[5]
[6] https://www.boerse-frankfurt.de/wissen/maerkte-und-segmente/general-standard-fuer-aktien
[7] https://www.deutsche-boerse-cash-market.com/scale/
