On with to post #3.
At the end of the previous one I made a question. If penny stocks are so dangerous and so the spreads are, why do you see them rising 200% or 400% in one morning?
Typically it's nothing to do with the company's actual goodness. It's nearly always a faux event.
We refer to it as, "The Pump. Knowing this is likely the most crucial of all the tips you'll be learning in this whole series.
Follow the directions for how the game is played.
Let's go back to our fake company, XYZ Corp. Suppose that they are, in fact, on the verge of bankruptcy. They have an old software which they sell from a basement somewhere and the stock has been dead for a year at 1 cent.
Some traders (or stock promoters) pick on it. They quietly buy up millions of shares at 1 cent. The stock is so low, it isn't that expensive for them to do this.
But now they have a problem. They own all these shares, but they don't have somebody to sell them to. Recall the volume problem we discussed in Post #1? They need buyers. Lots of them.
So, they begin the pump.
They send out alerts to Discord groups, Twitter and huge email lists. They inform thousands of beginner traders, “XYZ Corp has just developed a revolutionary new AI tech! It's the next thing on everyone's mind! Buy it now; it won't go up to a dollar!"
The alert is visible to the beginners. They experience a high level of FOMO (fear of missing out). They then go to their brokerage apps and begin to make abrupt purchases.
All this sudden buying demand causes the price to skyrocket. 2 cents. 5 cents. 10 cents!
The newbies are getting excited. They believe that they are geniuses. However, here's what they don't see.
The novices are in a hurry to purchase it for 10 cents, who is selling it to them?
The promoters.
These guys are selling off those millions of shares they purchased for 1 cent for a huge guaranteed profit, without announcing anything about it. This phase of the cycle is "Dump".
When the promoters have all cashed out, the alerts suddenly stop. The hype dies. The new traders cease to purchase. And the company is actually garbage, gravity comes into the picture. In less than an hour or two, the stock plummets back down to 1 cent.
The promoters get away with a lot of dough; the novices get the short straw, and end up with only 10% of their original funds.
This is a daily occurrence in the penny stock market. Literally every day.
You will need to recognize whether you are reading news from a real company or if you are being targeted in another pump and game.
The how to part of the difference will be discussed in post #4.