Short selling penny stocks in theory would seem like an awesome strategy since every single pump and dump eventually implodes and falls back towards $0.0001 but there are some very big reasons why it is not a good strategy for a majority of traders. When trading penny stocks you have to take many factors into consideration.
The problem with short selling penny stocks is that you must trade on margin where as buying penny stocks does not require or even allow using margin. When you place trades on margin you have to borrow money from your broker (whether you like it or not). For instance you typically have to put up 50% of the total position size dollar amount that you want to short sell, as collateral. This is called the initial margin and every broker that allows trading penny stocks requires this. If the stock does not drop immediately as you are hoping it will, and instead continues to rise, then the margin level in your account will drop. If the margin gets below 30% then the broker will issue a margin call which means you will immediately have to deposit more money into your account to bring the margin level back to the initial margin level at 50%. If you don’t do this they will liquidate your position immediately at the current market price and you will automatically lose money if you are down on the trade (potentially thousands of dollars). Since penny stocks can spike a very large amount in a very short period of time, and they sometimes continue to spike for days or even weeks, this can mean you could lose thousands of dollars this way, despite the fact that you know the stock will be back at $.01 or even $.001 in a few months, since all these companies are frauds. When shorting penny stocks you have to be very careful to cut losses quickly.
The other issues are that its very difficult to locate shares of these low priced penny stocks to borrow in order to short sell them and the margin rate is very high, sometimes 40% per anum (basically like borrowing from a bookie) when you try to hold these stocks longer term. There are several brokers that will allow you to short these stocks, but a majority will not since the risks of short squeezes are so high and since you are essentially borrowing money from your broker (margin) when you short sell, the brokers don’t like taking these sort of risks considering most people are clueless about the penny stock market.
On top of this, since you have to borrow shares of stock from the original owner of the penny stock, they may ask for their shares back at any time. This is called a “buy in” and it can happen after a few days or usually at most 13-15 days. If the stock is going higher and you are down on your short, and you broker issues a “buy in” you will immediately lose on the trade since the broker will buy back the shares that you shorted at the current market price (and this could be a large amount). Buy in’s almost always cause penny stocks to rise even more than they already have essentially causing an artificial short squeeze because many people short sell around the same price levels and therefore lots of buy ins occur at the same time.
The last problem regarding short selling penny stocks is also related to the brokers but basically there’s no single brokerage firm that will allow you to short sell a majority of low priced penny stocks. There are about 4 different brokers that when combined will let you short sell about 70% of these pump and dumps but they each have a minimum initial deposit amount and when combined you need at the absolute minimum $70,000. Most people don’t have this so this sort of trading capital so this is another issue. One of these 4 brokers even requires a minimum of $50,000 and you must agree to trade 500,000 shares a month at a price of .005 per share no matter what. Another broker requires $10,000 to open an account but you have to have $2.50 in your account for ever 1 share you want to short sell of a stock under $1.00. So to short 10,000 shares of a $.80 stock you need $25,000 in your account rather than $8,000. Another broker requires just $2,500 but they have very high commissions and average trades may cost you $40
which is completely absurd! They are also located outside the United States which is always a red flag.
In summary there are numerous angles to playing pumps. Buying the pump, shorting the dump and buying the bounce are the three strategies I utilize, but short selling is just not feasible for most people. I do it occassionally since my buy/sell zone indicator can help pin point the tops in these stocks, but its not nearly as simple as you would think it would be and most people will fail at short selling despite what Timothy Sykes claims. Tim Sykes is a notorious short seller and his strategy for shorting pump and dumps works, but you will never do as well as him because his followers always jump in and move the price of stocks in his favor. I would stay away from any of his alert services for short selling penny stocks and instead learn to be self sufficient at trading penny stocks.
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