There’s some controversy related to free penny stock newsletters for one big reason. Most of them are simply advertisements. Typically these newsletters have a few things in common. First, they are bullish to a fault. Second, they urge you to buy as soon as possible. Third, they are paid by a third party to advertise the securities that they urge you buy.
The bullishness is a forgiveable offense. After all, subscribers are looking for penny stock opportunities so it makes sense that the newsletter is touting the great direction of the company, it’s huge upside potential, and the great management team. That last one is a joke. I’ve never seen one of these say anything about the management team. That’s a little too legitimate. What’s wrong with the bullishness then? It rarely accompanies true analysis that would help the reader make an informed decision. The hope is that the bullishness is infectious enough that the subscriber will act without doing much research at all.
The fact that the newsletter urges you to buy the security as soon as possible is also understandable because early movers will benefit from a large uptick in price. It also makes sense that the reader would want to act as quickly as possible because over-the-counter (“OTC”) securities can have high percentage swings in value and missing the swing is a great way to lose your shirt. Why is it controversial to urge you to buy then? Because the newsletter doesn’t ever come with a follow-up email urging you to sell before things go south. Someone will make money on this deal and with a free penny stock newsletter, it probably isn’t going to be you.
The fine print is where the good stuff is. In the fine print of a free penny stock newsletter you’ll find a few interesting pieces of information. Generally you see that the owner of the newsletter was paid by the company it is touting so the free newsletter is completely and totally biased.
Let’s say you’ve started a company called Dave’s Plastic Microchips, a potential competitor to Intel. No one has heard of your company yet but you’ve got a great idea that is about to break into the market (or crash and burn like a led zeppelin). You know that if you can get some serious movement on your stock price, you can not only generate good publicity but also find potential new investors. So, you place a call and pay a someone with a huge email list to send out advice that your stock is about to pop. If it works well, your stock will rise and you’ll go to market at the same time. Your email will talk about the great future of plastic microchips and how your company is a first mover. The newsletter will go out and you can do a few different things. As the owner, you’ll ride the tide and make a lot of paper profits. Do you sell it all and get out? You could. That would be a pretty raw deal for those left holding the bag.
In the end, free penny stock newsletters are paid advertisements. Treat them like an informative look at a potential investment. It is step one in your research and analysis of the security. If it is your only step, prepare to get burned.