Many of so call investors like to invest (or I call it speculate) in Penny Stock. What is penny stock? In Malaysia terms, many classified those stock below 50 cents as penny stock. Why is penny stocks so popular among the retailers?
The main reason, people still assume that stock with cheap price can go up more easily and they can buy more units. In fact, a person who buy 100,000 units of 5 cents versus 1000 unit of $5 stock, both are paying same total amount of $5,000, But the one who buy the penny stocks tend to face more risk, as many of the investors have no idea who is behind the penny stocks and how these people operate the stock.
There's nothing wrong to speculate in penny stocks provided you know how these people operate it. Not long ago, some of the investors may noticed that Bursa issue an alert statement to all investors, one of the phase they did mentioned was "Pump and Dump" on penny stocks. If you like penny stock, then need to have basic idea how this work and perhaps use it to your advantage.
Normally, pump and dump happen when 'someone' want to push up the stock price and then sell it to others at higher price. Penny stocks usually are the target for them to operate it. Promoters (someone who being hired to do this job) will send out message through email, whatsapp and other social media, creating rumors that certain stock price going to move up due to whatever reason. (can be project or new contract) When the stock price move higher, they know when to get out.
The worst is, some time, you can find very bad promoters, one fine day, with high or near the highest volume day follow with stock price spike, they just dump everything to you, the stock price will follow by crash for next few days. Hence, identify the pattern of these Pump and Dump operation, normally can protect your capital, remember, when time to sell, you need to sell with no question ask.
Finally, money management is also a key point for investors to take note before jump into penny stock. Consider this, if you have one million, would you gamble away by flip a coin, imagine it's a 50:50 chance for both side? If you willing to risk all your available money for this, it must be something wrong in the process of thinking!
Hence, before start to jump in penny stock, perhaps and first question to ask is, how much do you risk on a single trade?