Every investor, whether they admit it or not, has dreamed of entering into a position at a very cheap price and watching it become a huge success, earning millions in profits. That’s human nature. We dream a lot.
That dream is the idea behind penny stocks. They’re extremely inexpensive shares from very small, up-and-coming companies on the stock exchange. Investors snap these shares up — usually in bunches — with the hope that they’ll one day explode.
The Securities and Exchange Commission (SEC) has a definition for what constitutes penny stocks: “Low-priced speculative securities of very small companies.” These companies, known as “micro-cap” companies, generally have yet to get a foothold in the investor marketplace. Trading volume is still close to nil.
Since they’re not liquid — meaning there’s not a lot of buying or selling taking place — it can be difficult to assess their true value. Penny stock investors bank on the chance that other traders are undervaluing the stock. They believe (or at least wish) that one day, it will take off, people will start buying shares in droves, and the price will go up.
Hey, it can happen. But oftentimes, it doesn’t. Purchasing a penny stock is almost pure speculation. That makes penny stocks far riskier than blue-chip stocks. Some brokerages won’t deal with them without very tight regulations. Some won’t deal with them at all.
Penny stocks’ low prices encourage investors to buy several shares. That can be dangerous. The extreme volatility of penny stocks means the chance of a high-percentage price drop is much greater.
Still, penny stocks remain too beguiling for many to ignore. This often means that they rely on penny stock alerts to clue them in on new opportunities.
What Are Penny Stock Alerts?
A penny stock alert is an instant notification that informs you when it’s time to move on a low-priced, micro-cap stock. It can come via text or email. Some mobile apps might issue a pop-up notification on your phone.
What triggers a penny stock alert? Usually, there has to be some kind of catalytic event. This can be the share price reaching a favorable point to buy or sell. It could be a sudden increase in trading volume. It could be a news event that’s expected to have some impact, like a leadership change or earnings report.
The main point of a penny stock alert — any stock alert, really — is to give you a head start to act fast on transactions. Of course, if you get a penny stock alert, then everybody else who’s signed up for it is getting it at the same time. So the implication is that if you don’t act fast, you’ll be missing out on a great opportunity. Or at least you’ll have to climb over the teeming hordes of other investors trying to get in.
Penny Stock Alerts and Fear of Missing Out
It’s that kind of herd mentality that drives so many inexperienced investors to make transactions in haste: The fear of missing out. That anxiety is so prevalent that the acronym FOMO has its own entry in the Merriam-Webster Dictionary.
FOMO is an aspect of all stock trading, of course, not just penny stocks. You see it whenever there’s an instant, sharp rise or drop in shares that spur a lot of activity. Investors get worried that they’re going to miss the boat on future or current profits, so they rush to join the fray.
But FOMO is not a philosophy or a competitive edge — it’s just a reflex. And it doesn’t play well on the stock market for a few reasons.
Part of the FOMO fallacy is the erroneous belief that if a stock price moves in a certain direction in a given time, then the momentum will persist. The price will continue to move in that direction. It’s kind of a Newtonian way of looking at the stock market, and it’s not always true.
Prices can and will drop or rise with total unpredictability. A transaction made under the fever of FOMO may turn out to be the wrong move. The stock price may fall or rise again to the point where FOMO followers started jumping in, making it an unprofitable or losing trade.
This brings to mind another problem with FOMO: It’s undisciplined. Whether one is a passive or an active trader, they can’t afford to be unruly or disorderly about their transactions. It clouds thinking and results in decisions that aren’t thought through.
Remember, the letter “F” in FOMO stands for “fear.” Fear is an emotion. If there’s one thing we try to hammer home on Gorilla Trades, it’s that emotionalism should never guide investment decisions.
Penny stock alerts can reinforce this herd mentality. This is especially true if they take place in unmonitored penny stock chat rooms. These are incredibly risky places to rely on for stock advice, even if they’re sponsored by reliable superstar investors or agencies. If your chat room has a roving gang of penny stock champions pushing a certain commodity, proceed with extreme caution. In fact, it’s probably better not to proceed at all.
Still, we get it. Penny stock alerts are seductive. And you may thoughtfully decide that despite the potential drawbacks, you’re reasonable and risk-tolerant enough to give one a try. You’ll be cautious and limit your investment in penny stocks. If you can contain your disciplined approach, what’s the harm in trying?
That’s fair. If you cap your portfolio’s percentage of penny stocks at 10% or so, you probably won’t expose your holdings to that much risk. As long as the remaining 90% are focused on more reliable, established investments, we concede that it’s okay. Probably.
How Free Are Free Penny Stock Alerts?
Understand this much about penny stock alerts: Just like insurance, legal advice, buffet-style restaurants, and motel rooms, you’ll get what you pay for.
Whatever reputable penny stock alert services are out there will cost you money — as well they should. Penny stock alert providers who charge for their services are more likely to offer unbiased advice based on practical data, like technical and fundamental analytics. That’s far from guaranteed. But it’s more likely with a paid service.
But if there’s one thing more enticing than a “penny stock alert,” it’s a “free penny stock alert.” You’ll find a lot of those on your favorite search engine’s result pages.
Nothing is ever truly free when it comes to financial advice. Free penny stock alerts are no exception. If you’re not paying to get advice from a penny stock alert, know that somebody is paying for the alert to get sent to you.
Some services — especially the free ones — receive compensation from companies to issue a penny stock alert on their behalf. The reasons for this are obvious. They’re micro-cap companies trying to drum up more investors and drive up their price. What better way to do that than to stir up action through a paid penny stock alert?
That might sound like a conspiracy theory. But in reality, it’s an allowable way of doing business in the penny stock alert trade — as long as the penny stock advisers reveal these payments in their online disclaimers. And that’s exactly what they do.
This is an actual statement from a free penny stock alert site that shall remain nameless: “Compensated alerts are solely a paid advertisement and are not unbiased and are never selected by any kind of algorithm or stock screening process.”
Free Penny Stock Alerts and Creative Disclaimers
Free penny stock alert companies, in place of reputation, use their disclaimers as legal protection in case your investments tank. Some of these disclaimers are pretty incredible.
For example, this is an actual disclaimer found on another free penny stock alert service we won’t name: “Individuals should go as far as assuming that all information contained in our newsletters about profiled companies is untrustworthy unless verified by their own independent research.”
All stock picking services have disclaimers explaining the risk involved with stock trading. We have one explaining that nothing we say “shall create any warranty.” That’s industry standard and we hope you understand that.
What isn’t industry standard is saying, “Please assume that everything we’re saying is wrong, unless you find out otherwise on your own time.”
When a free penny stock alert site makes a statement like that, they know they have issues. And you should know they do, too.
How to Proceed with Penny Stock Alerts
We hope we’ve outlined some of the big risks involved with penny stock alerts. If what we’ve said hasn’t scared you off the prospect, then at the very least exercise the most due diligence you’ve ever had about anything in your life.
Avoid free penny stock alert services. There is almost always someone with a vested interest influencing the choices they make.
Steer away from penny stock alert sites that make outlandish promises, like “Huge profits for almost no investment!” That should be an immediate red flag for anything, especially stock-related companies.
Don’t let yourself get bullied into penny stock investments. Whether it’s fellow investors, hyperactive chat rooms, or the service itself, don’t let a source of advice force you into emotional decision-making.
Keep a very tight limit on your overall investment in penny stocks — a cap of 10% of your overall portfolio, as we mentioned earlier.
Finally, whatever penny stock alert service you sign up for, read the disclaimer. That should give you a good idea of what you’re really in for — and probably a good laugh or two, as well.
Gorilla Trades: The Smart Alternative
Gorilla Trades, as you might have guessed, doesn’t deal with penny stocks. We use a purely data-driven, 14-point strategy to find strong stocks with the best potential to break out. Find out more with a free trial.