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trading at $10 when you just shorted it at $2 a few days before? I learned that lesson the hard way. It turned out that I was risking $8 to make $2, which is not a good way to make money over the long term. To add injury to insult, a penny stock might appear to be liquid one day, and the next day, the liquidity dries up and you are confronted by a $2 bid/ask spread. Or the bid might completely disappear. Imagine owning a stock for which there are now no buyers. Stay away from all stocks under $10. Also stay away from trading newsletters that hawk penny stocks. The owners of these newsletters are often paid by the companies themselves to hype their stocks. Or they may take a position in a penny stock, send out an email telling everyone to buy it, and then sell their stock at a much higher price to these amateur buyers. Watch the movie "The Wolf of Wall Street" if you’d like to see a famous example of the decadent lifestyle and fraud that often surround penny stocks. Viewer discretion is advised. 3. Don’t short stocks. If you are an advanced trader, feel free to ignore this rule. If you are not, I would seriously encourage you not to ignore this rule. In order to short a stock, you must first borrow shares of the stock from your broker. You then sell those shares on the open market. If the stock falls in price, you will be able to buy back those shares at a lower price for a profit. If, however, the stock goes up a lot, you may be forced to buy back the shares at a much higher price, and end up losing more money than you ever had in your trading
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Matthew R. Kratter (A Beginner's Guide to the Stock Market)