Some of the companies WSHS will profile are traded on Pinksheet and OTC Bulletin Board markets. To educate yourself on the difference between OTC BB and Pinksheets you can visit . http://www.sec.gov/answers/pink.htm and http://www.sec.gov/answers/otcbb.htm . These stocks are classified as pennystocks.  Because these companies are small, thinly-traded companies they are usually the most risky investments that you can make, you should always get as much written information as you can from the company and other independent sources. Also, and unfortunately, these companies are highly susceptible to fraud and manipulation. Thus, WSHS would like to provide you with some tips to protect yourself and a strategy to help you make winning trades. 

PLEASE NOTE WELL: WSHS employees are not registered as an Investment Advisor in any jurisdiction whatsoever. The disclaimer is to be read and fully understood before using our site, or joining our email list or implementing any of our strategies.

Penny Stocks

From Wikipedia, the free encyclopedia
In the United States, a penny stock is a common stock that trades for less than five dollars a share and is traded over the counter (OTC) through quotation services such as the OTC Bulletin Board or the Pink Sheets. Although "thinly traded," daily share volumes can be in the hundreds of millions for a sub-penny stock. Legitimate information on penny stock companies can be difficult to find and the underlying equities can be easily manipulated.

Definition
In the U.S. financial markets, the term penny stock commonly refers to any equity trading at less than $5 per share, or one that is listed outside one of the major exchanges (NYSE, NASDAQ, or AMEX), and is often considered pejorative.
In the UK markets, penny shares as they are more commonly called, generally refer to shares in small cap companies, defined as being companies with a market capitalization of less than £100 million and/or a share price of less than £1 with a bid/offer spread greater than 10%. In the UK Penny Shares are covered by a standard regulatory risk warning issued by the Financial Services Authority(FSA).

High-risk investments
Many new investors are lured to the appeal of micro-cap shares and low-priced equities due to perceived potential for rapid growth, which can appear to be occurring if the equity is being promoted. However, severe loss can occur and many lose all of their value in the long term. Accordingly, the SEC warns that penny stocks are high risk investments and new investors should be aware of the risks involved. These risks include limited liquidity, lack of financial reporting, and fraud.
Sudden changes in demand or supply of low-priced shares can lead to volatility, and potentially cause major percentage moves to the upside or downside. Besides being significant in size, such price spikes or dips may occur over very short time frames, whether that means weeks, or days, or hours.
A lack of liquidity can make them more vulnerable to price manipulation, and increases the difficulty investors might have to sell their shares as there may be few or no buyers at any point in time. This can also make the stock extremely difficult to short, although most brokers do not allow for short selling on shares that are not "option eligible," such as those trading for less than $5.
Unlike NASDAQ or the NYSE, there are only minimal requirements for an equity to be quoted on the OTCBB, and even less to garner a listing on the Pink Sheets market. Some of the listing requirements to be on major exchanges, such as timely filing of financial reports, investor relations and communications commitments, and significant annual fees are much more lenient for companies that list on these minor markets. In fact, companies that fail to meet minimum standards on one of the broader exchanges, and are delisted as a result, often relist on the OTCBB or the Pink Sheets.
In fact, any company whose shares are trading on the Pink Sheets (recognizable with a .PK suffix by some brokers and quoting services) has little to no regulatory or listing requirements whatsoever, at least compared to major markets. There are no minimum accounting standards, change in notification of ownership of shares, and reported other material changes affecting the financial viability of a company, all of which are designed to protect shareholders.
The SEC notes most of the same about Internet message boards, where fraudsters claiming to be unbiased investors who've carefully done their due diligence may in fact be company insiders, and that a single person or a small team can create the appearance of a huge interest in a stock simply by creating a huge number of aliases, while banning the most vocal or perceptive critics of these offerings.

Potential fraud
Main article: Microcap stock fraud
Low-priced shares and micro-cap stocks are often relentlessly promoted as part of illegal pump and dump schemes. The SEC explains how it works:
"A company's web site may feature a glowing press release about its financial health or some new product or innovation. Newsletters that purport to offer unbiased recommendations may suddenly tout the company as the latest "hot" stock. Messages in chat rooms and bulletin board postings may urge you to buy the stock quickly or to sell before the price goes down. Or you may even hear the company mentioned by a radio or TV analyst. Unwitting investors then purchase the stock in droves, creating high demand and pumping up the price. But when the fraudsters behind the scheme sell their shares at the peak and stop hyping the stock, the price plummets, and investors lose their money. Fraudsters frequently use this ploy with small, thinly traded companies because it's easier to manipulate a stock when there's little or no information available about the company."
Another fraudulent scheme is the sale of chop stocks in which shares acquired below market under Regulation S are illegally sold to overseas or domestic retail investors.
Other common scams include spam e-mails and junk faxes that tout ludicrous and fraudulent claims, crooked newsletter writers who promote a stock for a fee, message boards swarming with "buy now!!!" postings about a stock from anonymous, paid posters, fake or misleading press releases issued by the company, or boiler rooms full of cold-callers targeting naive, elderly, or foreign buyers all in attempt to drive up the share price just before the insiders sell.
While there were very serious concerns in recent years of organized crime gangs manipulating prices of equities, including those operating out of Eastern Europe and Asia, these issues are no longer of great concern. Greater investor knowledge, combined with domestic and international cooperation and crackdowns, have seen an almost complete reduction in such illegal practices from previous years.
While not all stocks listed on the Pink Sheets or the OTCBB are fraudulent, one Business Week article estimated that chop stocks alone "make up perhaps half the 85 million-share daily volume of the OTC Bulletin Board."

Internet spam
Many Internet users have been exposed to e-mail spam promoting penny stocks. According to a study conducted at Oxford University, 15% of all spam was related to penny stock fraud. According to the study, "People who responded to the 'pump and dump' scam lost 8% of their investment in two days. Conversely, the spammers who buy low-priced stock before sending the e-mails, typically see a return of between 4.9% and 6% when they sell."

References

External links

Other Helpful links

http://sec.gov/investor/pubs/cyberfraud/newsletter.htm

http://www.sos.mo.gov/securities/pubs/Penny%20Stocks_01.2005.pdf

http://www.investopedia.com/articles/03/050803.asp

Lastly, my best advice is to always do your own research, and to only risk what you can lose.  The markets can be a ruthless place so education is your best tool. Your biggest enemy is greed. Pennystocks can make huge swings so the gains can be tremendous but so can the losses.