One option to earn money with penny stocks is to bet that they will go down in value. This is called short selling and is a common practice among seasoned small-cap investors and online penny stock brokers. Essentially, when you short sell a share you sell someone else’s share of stock on the market with the requirement to repurchase it later. So if the stock goes down you win. Since penny stocks have a higher chance of bankruptcy or little chance of earning returns there is a higher potential they will go down than the well established companies in the major stock exchanges.
One place you can begin to look for penny stocks to short sell is by looking for companies that clearly have no plan to earn money. One example of this is 1-900-Jackpot (Ticker: OTCBB:ONJP). This company use to have “proprietary” lottery technology. What’s wrong with floating white balls? The company never actually sold anything, but shares of stock. When that scam fell through they bought a defunct medical device company and talked about buying some failed builders. Obviously using money from investors who knew nothing about what they were buying.
Another strategy to look for short sales is by investing in companies that are in hurting or failing sectors. If the companies that did well for decades in the industry are hurting then the small start-ups are probably hurting really bad. The last place I like to look for shorts are for companies whose whole business model is shorting other stocks. The stock market as a whole climbs over time and thus companies whose premise to earn money by shorting certain sectors tend to have their odds stacked against them from the beginning.
Remember to always exercise caution when shorting stocks because your risk is unlimited, as there is no limit a stock could climb while you have it shorted. Needless to say, this isn’t your “penny stocks for beginners” type of strategy. When you buy a stock the most you can lose it what you invested but when you short a penny stock at $1 per share and it gets to $5 per share you now owe 5 times what you earned. Not a good situation to be in.
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