โ ๏ธ๐ ๐๐๐ง๐ง๐ฒ๐ฌ๐ญ๐จ๐๐ค ๐๐๐ ๐โ ๏ธ
๐บ๐๐๐๐๐๐๐๐ ๐น๐๐๐๐๐๐๐ ๐๐ ๐๐ ๐ ๐๐๐ ๐๐๐๐๐๐๐ ๐๐ ๐ ๐๐ ๐จ๐๐๐๐๐๐ ?
I've read pennystock recommendations on Getquin many times in the past, whether from users themselves or elsewhere. This is very upsetting to me, as it makes the seriousness of this platform suffer. I hope that this platform will develop into a good and serious platform. After all, the potential is there. And who knows me, knows that I am a fan of constructive criticism (and not through the "flower")! Therefore, I would like to write you herewith a guide on how to avoid dubious pennystocks.
This post is about the majority of pennystocks, which have a lot in common, which I will go into in a moment. Of course, there are interesting and reputable companies here as well. But how to distinguish the good companies from the many scam stalls is something I would like to explain below.
๐. ๐๐ฟ๐๐๐ฒ ๐ช๐ฎ๐ฟ๐ป๐ต๐ถ๐ป๐๐ฒ๐ถ๐๐ฒ
Pennystocks are usually stocks whose value is in the low cents range. Very popular with dubious pennystocks are stock exchanges from little regulated markets, such as Canada. Therefore, first look at the ISIN (starts with CA). Of course, this does not have to be a direct exclusion criterion, because there are also reputable companies with low market capitalization in Canada. However, it is a first possible indication!
These often Canadian penny stocks like to have a "second listing" in Germany. With a "secondary listing" in Germany, the companies quickly get the so-called "stupid German money". After the listing in Germany, the "promotion machine" is turned on.
But one thing at a time....What do we have to look out for besides the ISIN, which of course does not define a dubious pennystock, and how can we avoid these pennystocks? I will show you all that in the following!
๐๐. ๐๐ฒ๐ณ๐ถ๐ป๐ถ๐๐ถ๐ผ๐ป ๐๐ผ๐ป ๐ฃ๐ฒ๐ป๐ป๐๐๐๐ผ๐ฐ๐ธ๐
In the past, all stocks trading below $1 went by the term pennystock. However, the SEC (U.S. Securities and Exchange Commission) has expanded this definition somewhat. Thus, by U.S. definition, all stocks below 5 USD run as penny stocks. Often these are 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 high percentage movements. For this reason, investors are almost magically attracted to penny stocks. Because one promises oneself thereby fast profits and probably also fast wealth. Aggressive marketing and this psychological effect among private investors then often leads to irrational actions.
๐๐๐. ๐จ๐ป๐๐ฒ๐ฟ๐๐ฐ๐ต๐ฒ๐ถ๐ฑ๐๐ป๐ด ๐ฆ๐บ๐ฎ๐น๐น ๐๐ฎ๐ฝ๐ ๐๐ ๐ฃ๐ฒ๐ป๐ป๐๐๐๐ผ๐ฐ๐ธ [๐ฑ]
Like penny stocks, small caps also have a very small market capitalization. By definition, this is between $250 million and $2 billion (share price x number of shares) for small caps. Nevertheless, there are crucial differences:
-Small Caps can also be traded above > 5 USD.
For example, a share with a price of USD 100/share and 8 million outstanding shares can belong to a small cap because the market capitalization is only USD 800 million.
Short digression: Don't forget, the market capitalization divided by the profit or sales results in the P/E ratio.
-Small caps are also traded on traditional stock exchanges (e.g. NYSE, NASDAQ).
This point is probably the deciding factor. The listing on a large stock exchange, where the corresponding requirements must be met, already creates a certain seriousness.
Likewise, there are companies that are traded in the pennystock segment, but have a market capitalization that exceeds that of a small cap:
Alumina: world's largest producer of aluminum and bauxite - market capitalization approx. 2.91 billion USD
The seriousness makes itself thereby already somewhat at the definition criteria. Especially the stock exchange trading place is important to me.
๐๐ฉ. ๐ข๐ง๐ ๐ ๐ฎ๐ฟ๐ธ๐ / ๐รถ๐ฟ๐๐ฒ๐ป ๐บ๐ถ๐ ๐ด๐ฒ๐ฟ๐ถ๐ป๐ด๐ฒ๐ฟ ๐ฅ๐ฎ๐ด๐๐น๐ฎ๐๐ผ๐ฟ๐ถ๐ธ
As mentioned, pennystocks are mostly traded on the OTC market and not on major exchanges such as NASDAQ or NYSE.
The OTC market can be defined as follows:
"Off-exchange trading of stocks or bonds between financial market participants. The OTC market or over-the-counter market is usually understood to mean interbank trading. Trading takes place outside the responsibility of an exchange, but is subject to the applicable legal requirements for securities trading." [2] Nevertheless, this is less regulated and much more illiquid than large exchanges.
Examples:
-NASDAQ OTC
-LS Exchange
Due to the lower requirements and regulations, among others, the
-CSE (Canadian Security Exchange) and
-NEO Exchange (Canadian Stock Exchange in Toronto)
should be mentioned.
Both are not OTC trading venues. However, due to lower regulatory requirements, they are also used by penny stocks to seek a secondary listing on the OTC market for greater reach/tradability. The list is not exhaustive.
Overview of Canadian companies traded on the US OTC market:
https://stockmarketmba.com/canadiancompaniesthattradeotc.php
So why are many pennystocks 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 NASDAQ:
General Standard:
"The General Standard is a segment of the EU-regulated market. Companies in the segment are subject to the minimum legal requirements of the Regulated Market." [6] Regulation is carried out by 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 represents the segment with the highest requirements on the Frankfurt Stock Exchange (FWBยฎ) 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 admission follow-up obligations of the Prime Standard are characterized by a higher degree of transparency requirements, including, for example, the requirement to fulfill them in English as a matter of principle." [7]
Under the following link you will find the factsheets of the general and the prime standard as well as further information:
https://www.deutsche-boerse-cash-market.com/scale/
๐ฉ. ๐๐ฟ๐ฒ๐พ๐๐ฒ๐ป๐
The volume of trades in pennystocks is usually very small. Of course, this also means that small purchases and sales can lead to large price movements. However, this then often has nothing to do with the great strategy of the company but arises from pure speculation and market manipulation. Exceptions confirm the rule, of course.
๐ฉ๐. ๐จ๐ป๐๐ฒ๐ฟ๐ถรถ๐๐ฒ ๐ฃ๐๐๐ต๐ฒ๐ฟ
A common method of pushing rogue pennstocks is so-called "scalping," in which targeted advertising campaigns are used to enable players to profitably sell off their own holdings of a company's stock. In this process, the pushers, or simply scammers, recommend the penny stocks they hold for purchase via stock market letters, advertising appeals, spam mails [4]. Often the pushers receive these shares as payment from the company. So they never spent money on it themselves. The only goal is to find buyers for their own junk. These advertising campaigns start after a German dual listing, as mentioned above. So 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 of these scammers are usually very lurid and accompanied by many promises. Here are two small examples, so that you understand what I mean:
Directly in the headline there is talk of a price bomb. Also, price potentials are gladly advertised directly. All these are immediately indications for dubious pushers!
Examples for dubious pushers:
Helmut Pollinger - Bullvestor
Rainer Hahn - MSM GmbH (swissinvestor.de)
Rich TV Live - youtube channel
Another example, where Bafin has also intervened:
https://aktienblogger.com/2021/01/04/aktienpusher-unseriose-kaufempfehlungen/
But I am sure that there are more pushers that you are welcome to mention in the comments (better, should!).
๐ฉ๐๐. ๐๐ถ๐๐ฐ๐น๐ฎ๐ถ๐บ๐ฒ๐ฟ
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 from above regarding Taat:
The publisher and responsible authors hereby declare that the following conflicts of interest exist with respect to the company discussed in this publication of the company at the time of publication:
- I. Authors and the publisher, as well as related Consultants and principals hold stock positions 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 stock discussed.
- II. Autors and the publisher and principals, as well as consultants related to them, maintain a consulting mandate with the discussed company at the time of publication and receive a fee for this. Authors and the publisher are aware that other stock letters, media or research firms discuss the stock during the same period. Therefore, symmetrical information and opinion generation occurs during this period. This publication of bullVestor is explicitly not a financial analysis, but a publication of a very clear and unambiguous promotional character on behalf of the companies discussed.
My tip therefore: If you find an interesting pennystock first look for published articles and whether such conflicts of interest exist. If yes, fingers away!
Because why should you buy if the so-called analyst states in the disclaimer that he might sell the stock?
๐ฉ๐๐๐. ๐๐ถ๐ฒ ๐จ๐ป๐๐ฒ๐ฟ๐ป๐ฒ๐ต๐บ๐ฒ๐ป๐๐๐๐ผ๐ฟ๐
To all these indications, the story or business model of the pennystock is complementary. Because this story usually sounds so great that one also directly suspects a gamechanger 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 properties to obtain CO2 certificates, which are then sold.
Of course, this all sounds great, but it should make you wonder.
๐๐ซ. ๐๐ธ๐๐ถ๐ผ๐ปรค๐ฟ๐๐๐๐ฟ๐๐ธ๐๐๐ฟ
Take a look at the shareholder structure as well! If the group's management hardly owns any of its own shares, this is also the 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 is no big 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!
๐ซ. ๐๐ผ๐บ๐ฒ๐ฝ๐ฎ๐ด๐ฒ ๐ฑ๐ฒ๐ ๐จ๐ป๐๐ฒ๐ฟ๐ป๐ฒ๐ต๐บ๐ฒ๐ป๐
Investor Relations: Does the company have an investor relations section? Basically, every listed and reputable company has an investor relations section where press releases or quarterly and annual reports are published. Other information, such as key figures, share price developments, corporate goals and strategy, as well as the stock exchange on which the company is listed, is also readily available. Everything that could be interesting for an investor and provides 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 find a homepage for the company at all, this is of course additionally alarming!
๐ซ๐. ๐๐ฎ๐ณ๐ถ๐ป
Bafin also provides warnings regarding serious investment:
The Bafin brochure contains much of what I have also summarized here:
๐ซ๐๐. ร๐ฏ๐ฒ๐ฟ๐๐ถ๐ฐ๐ต๐ ๐๐ ๐ฑ๐ฒ๐ป ๐บ๐ฒ๐ถ๐๐๐ฑ๐ถ๐๐ธ๐๐๐ถ๐ฒ๐ฟ๐๐ฒ๐ป ๐ฃ๐ฒ๐ป๐ป๐๐๐๐ผ๐ฐ๐ธ๐ ๐ฎ๐๐ณ ๐๐ฎ๐น๐น๐๐๐ฟ๐ฒ๐ฒ๐:๐ผ๐ป๐น๐ถ๐ป๐ฒ
https://www.wallstreet-online.de/statistik/top-pennystocks-aktien-meistdiskutiert
๐ซ๐๐๐. ๐๐ต๐ฒ๐ฐ๐ธ๐น๐ถ๐๐๐ฒ
Google news of the company.Review disclaimer of the news.Evaluate publisher of the news and its seriousness (lurid headlines / big price promises / other publications of the publisher).Check shareholder structure (how many shares do the founders have? / are there large institutional investors?)Company homepage - investor relations section available? Is there a homepage at all?Review management and CVs (e.g. LinkedIn) - Are the people reputable? Have there been fraud cases and dubious company cooperations before?
๐ซ๐๐ฉ. ๐ฆ๐ฐ๐ต๐น๐๐๐๐๐ผ๐ฟ๐
I hope my guidance will help you make the right decisions in the future. In the end, however, as in most of my posts on business valuation/analysis (see my profile), the goal is to reduce bad decisions. Thus, fraudulent actions, far from pennystocks, can also happen (see Wirecard). But if you critically question certain things and do not let yourself be seduced, you will be successful on the stock market in the long run and avoid scams of this kind!
In this context, I would like to draw your attention to the voting for the shit stock 2022. Because exactly here also pennystock scam booths belong to it:
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/
