The internet is full of scams. One of these schemes involve websites that “help you invest” in penny stocks that will give you a 400% or 1000%+ return. Some of them are probably legit, but most of them are complete scams. Additionally, even the “legit” ones are dangerous and will probably make you lose money because all they are doing is just front-running your trades and making a boat load of money at your expense. Overall, penny stock “newsletters” are just a big pyramid scheme.
Pyramid-like Scheme
As an example, I’ll use the website HotOtc.com, which claims to have more than 65,000 “smart” investors on their newsletter about penny stocks. While I’ve never invested in any of their stock picks or penny stocks, I’ve been on their newsletter for some two years now just keeping track of what they do.
If you go to their website, you’ll see a bunch of stock picks that they claim went up 400% or 600%. As expected, they don’t talk about the ones that went down by 50% or 80% in one day. Or the ones that went up 400% in one day and down 90% the next day, which happens quite often.
[Update: They've recently added the following disclaimer on their 'super results': Gains are based on intraday high.]
People may also not know that very small volumes can dramatically move penny stock prices. If you have a 5 cent stock that trades on average 1,000 shares a day and you send a letter to 65,000 people telling them to buy it, you’re likely to have a big upswing even if only 10 or 100 people buy a few blocks of the stock.
How does the website/insiders profit from all of this?
Well, the most obvious one is that they buy it first (”front-running”) and then tell everyone else to buy it so they can get out at the 400%+ upswing (No wonder they claim their gains on intraday highs!). As the selling occurs (usually in less than one day or a week), the stock swings completely downward again. As in any pyramid scheme, whoever is caught in the bottom (bought last) loses out badly.
Conflict of Interest
HotOtc.com’s “stock recommendations” are also companies that pay thousands of dollars for HotOtc.com to send out these alerts.
[Update: Funny, but since this page started ranking 1st in Google, HotOtc not longer sends out these disclaimers in their email.]
Here are a few disclaimer excerpts from some newsletters sent out in the last two weeks or so:
Hototc.com has been compensated by a third party Oceanic Consulting twenty thousand dollars for a one time news alert on IGNT. Hototc.com has been previously compensated by a third party Oceanic Consulting twelve thousand dollars for a one time news alert on IGNT. Hototc.com has been previously compensated by a third party Oceanic Consulting twenty five thousand dollars for a one week IGNT advertising services contract which has expired.
Hototc.com has been compensated by a third party Saf Capital thirty thousand dollars for a one day SSHO advertising service contract.
Hototc.com has been compensated by a third party Bravo International Services twelve thousand dollars for one time news alert on DUSS. Hototc.com has been previously compensated by a third party Perati Finance Corp twenty five thousand dollars for a one month DUSS advertising services contract which has expired. Hototc.com has been previously compensated by a third party Sihl Investments Corp fifteen thousand dollars for a one month DUSS advertising services contract. Hototc.com has been compensated by a third party Seacoast Advisors Inc. thirty thousand dollars for a one month HBSY advertising services contract.
And it goes on and on. Some companies pay HotOtc.com $60,000 or more for one alert. Talk about conflict of interest.
In sum, I would stay away from these penny stock newsletters, unless you’re a pro at getting in before the upswing and doing what the insiders from HotOtc.com are doing…selling when everyone is done buying.
And remember, if it’s too good to be true, then it probably is. Also, a penny stock is a penny stock for a reason. It’s a bad company. Lastly, you probably think you can outsmart/buy first…but so does everyone else.
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