Do You Need Penny Stock Trading Software?

Unregistered brokers market penny stocks with claims of fast profits.
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Penny stocks are stocks priced below $5 per share, most of them traded outside the major exchanges through a broker not registered with the Securities and Exchange Commission. Avoiding most penny stocks is good for many reasons, but their low share price, aggressive marketing and the occasional penny stock that hits it big give them a certain allure. You may wonder whether penny stock trading software may help you identify worthwhile stocks in this generally untrustworthy market.

Obtaining Reliable Information on Penny Stocks

One possible argument for obtaining penny stock trading software may also be a good reason for not buying penny stocks in the first place. Very little reliable information is available about most penny stocks: buying them is more an exercise of faith than a rational investment decision unless you have some way of evaluating them objectively. Since information about penny stocks, other than the promotional materials of those touting them, is generally scarce, software that analyzes market information with proprietary algorithms to find winning stocks could be a great idea.

Best Penny Stock Software

One blog, Trading Penny Stocks, identifies what the writer claims is the best penny stock software, the Penny Stock Prophet. According to the writer, he has had incredible success with this software program. Six readers of the blog also comment on their success and congratulate the writer: "spotless work," "really fantastic post" and "wonderful presentation." From these endorsements, it seems the Penny Stock Prophet may be an excellent software program. Best of all, it's free. But the buyer should beware.

Trouble in Paradise

The problem with the Penny Stock Prophet and other programs like it is that it's hard to evaluate the objectivity of the programs or the people who give them glowing recommendations. As "The Investor's Journal" notes, one of the prime ways that pumpers and dumpers -- those who hype a stock, then dump their holdings when the price climbs high enough for them to profit -- get unsuspecting investors to buy overpriced penny stocks is by providing them with supposedly "objective" promotional material. Penny stock trading software is one way to do this. The software provider already owns the stock the software identifies as an incredible buying opportunity. This is the pump. Once enough investors buy the stock identified by the software, the software provider sells the stock, which promptly loses most of its value; that is the dump.

Hitting It Big

While most financial writers advise against buying penny stocks, it is undeniable that a very cheap stock occasionally hits it big. Scott Rubin, writing on MSN, names 10 penny stocks that made investors a lot of money. Most of these, such as Pier 1 Imports (PIR), are the stocks of legitimate and formerly exchange-listed companies that fell on hard times, then recovered. You wouldn't have needed penny stock trading software to identify them: Even at Pier 1's low point, for instance, when the stock sold for 11 cents, you could have followed the stock and learned more about it through legitimate sources, such as CNN Money, Market Watch and "The Wall Street Journal," all of which continued coverage through the company's decline and recovery. You don't need penny stock trading software to find these companies.

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