The Sedate World of Penny Stocks

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On May 17, 2010, I witnessed one of the most sedate days I’ve ever experienced on the market. I operate in the world of penny stocks. Those stocks traded primarily in the Over the Counter Bulletin Board and Pink Sheets markets.

The volume had dried up and everyone kept saying it was due to Europe’s bailout package of the so called PIIGS nations (Portugal, Ireland, Italy, Greece and Spain). I really doubt that since your average penny stock speculator doesn’t play in the same realm as those funds destined for things like bailouts, or mutual funds or even treasuries.

So what do I think caused the dismal volume that day? Simple. The promoters were getting tired. I don’t mean they weren’t working…I mean they were using the same old, same old type of promoting to try to entice speculators into taking a shot on their particular deals.

Let me give you an example. On Friday May 14, 2010, one of the best known and followed email lists in the business profiled a little company that hadn’t traded all that much before. The company, ticker symbol ECRY.OB, shot up from around $0.50 to over $0.70 and traded almost 3 million shares on the day.
On Monday May 17, 2010, the same list put out an alert on another company FLPC.OB and traded about 400,000 shares up to $0.78.

Both are good companies, so what accounted for the difference in interest? I contend it is the promotion. ECRY.OB had, and still has 30 second commercial spots airing on CNBC. It also is an Alliance Partner with Research in Motion (NASDAQ:RIMM). In short, it is doing the right things to convey a sense of stability in a volatile world on an even more volatile trading exchange. In short, it is doing things differently, counting less on faith and more on substance.
No one in their right mind would advertise on television and invite that kind of scrutiny unless they knew they could stand up to the scrutiny and ensure their claims were genuine. I haven’t seen a penny stock advertise on TV for a very long time – years in fact.

So what kind of measurable impact did this have on speculators? On day one of the promotion, the stock traded huge volumes. On day two of the promotion, May 17, 2010, when other issues were struggling for any type of volume, the company managed to trade close to one million shares. Liquidity is the lifeblood of any exchange and promoters provide it on the penny stock exchanges.

Lets face it, liquidity is the name of the game. That’s the whole reason people invest in stocks rather than real estate. So they are liquid and can get in and out at their convenience. Put another way, what’s the point of being invested in anything, even a stock, if the price of that investment keeps going up, but you can never sell it or monetize it in any way? It is absolutely useless.

Penny stock promoters who provide that liquidity deserve our respect. They are the ones allowing efficient functioning of the market.