I get these emails frequently promoting some penny stock that is guaranteed to go up. Of course, the scam is that the promoters of this scam purchased their stock for pennies, and are spamming unwitting investors in an attempt to get the price to rise a little so they can sell their holdings at a profit, and leave new investors holding the bag when the price drops.
I tracked one of these stocks, which was selling at .55 per share when I got the email. It rose to 1.55, then plummeted to .15.
So, could I make money by selling these stocks short? They always rise a little , then sink like a stone. Seems like a sure thing, so there must be a catch; what is it?
I think the catch - besides becoming a blood sucking weasel little better than the spammers sending you the stuff - is knowing exactly when to dump it. And there you’re at exactly the same spot as with any stock - do you sell at $1.54 or hope it goes to $1.55? If you hold it an hour too long, you’re screwed. Of course, you’re probably only screwed for a little bit, since they’re such cheap stock, but it’s still a gamble and game of chicken with people you can’t see flinching.
The blood sucking weasel part comes in because you’re not taking a chance on the company, as stocks are “meant” to be played by gentlemen, you’re betting on other people being dumbasses and artificially inflating the price and holding it longer than you, mostly likely because they don’t understand the “rules of the game”. Said dumbasses are the ones to take a loss at your profit.
Is taking advantage of dumbasses ethical and sound investment strategy? WWALD? (What Would Anton LaVey Do?)
The OP’s question was about selling short. First problem - finding a broker who would let you short it. In general, you can’t short low volume penny stocks.
I don’t think the OP actually means selling short, he means buying them and then dumping them before the bottom falls out. While I suppose it’s possible, i think it’s something akin to trying to beat a crew at three-card monte. They know what they’re doing, and they know lots of people will try to dump before they do.
I think the OP does. As he/she said, they sink like a stone when everyone tries to take a profit. Shorting them would be a sure bet, if you could do it.
No, I meant selling short; borrowing shares, selling them, then buying them back when the stock tanks to return to the lender, retaining the difference as profit.
I guess you have to find a broker with shares to loan first, and that’s the rub.
This Investopedia article explains it fairly well. I can’t think of any major brokerage firm who allows the shorting of these types of stocks. One reason is because there often aren’t shares to lend. The shares would have to be held in a margin account at the brokerage firm. Most people with margin accounts use them to purchase marginable stocks.
Well, what about the not selling short bit? That is, what if FEAR receives a bit of spam in the morning, buys right away, then sells as soon as the stock rises, but not too much. That is FEAR would not make as much as the spammer, but could turn hefty (percentage-wise) profits.
Theoretically, sure, but the point of pump-and-dump is that the stock is only rising because of the pumping. As soon as the scammers stop sending those spams and making cold-calls, the stock stagnates. THEY are in control of the stock’s price, so they decide when it’s high enough, then get out. They can do this after the price has risen $0.03 a share or $3 a share; you don’t know. So you’re playing with fire, and your odds aren’t great.
This scam plays upon avarice and the belief that a person is somehow unlikely to get ripped off, some of the same funadmental emotions that drive much of the legitimate stock market. There probably are guys who try and pull off what the OP is proposing . . . until they lose their shirts by guessing wrong just like everyone else.
In addition, you might have problems finding buyers in a timely fashion. The pump and dumpers most likely have sold the stock to you, but when you try to get out, they aren’t buying. By the time you find someone, the stock may have tanked.
