I just found a good article discussing the 'art of buying thinly traded stocks.' It has some great information about such stocks, despite the author's low blow at bloggers. Here's a snippet (emphasis is mine):
At its best, the Internet can offer the public, including investors, a wide range of information about companies and their stocks. However, not all this information is true or accurate. As I had mentioned in Monday's column, Web-based chat rooms or bulletin boards designed to inform investors are frequently used to "pump up" thinly traded stocks, particularly companies listing on the Over-the-Counter Bulletin Boards.In the past, stock manipulation was mostly limited to boiler rooms and shady stock promoters. However, due to the ubiquity of the Internet, that's no longer the case. The anonymous nature of the Internet makes it easier for blog authors to exaggerate and lie. Authors can claim to be any sort of expert on just about anything, and there's often no way to verify these claims or their credentials. Internet postings designed to "pump up" stocks are particularly common and widespread in the United States. Although I don't have any firm numbers on this, I have seen some estimates that claim over half the messages on the Internet bulletin boards contain false information – either incorrect or deliberately false information.
Don't believe everything you read. It is very easy for people to disguise their identity online. Some stock scams involve projects in remote corners of the globe that can't be easily checked out. In addition, they often use technical jargon and babble that can only be deciphered by experts. Furthermore, many tips in chat rooms claim to be based on "inside information." Even worse, if they are in fact based on inside information, this may not be disclosed in a chat room. Tips posted on the Web are rarely, if ever, true. And trading on inside information is illegal; see this recent ITMJ column.
I would not ever buy thinly traded, little-known stocks based on information from a chat room or Internet bulletin board. These types of thin securities are easily manipulated. Large cap, highly liquid stocks are easy to investigate, and there is an overwhelming amount of information about these names. However, unlike the large cap stocks, the price of a thinly traded low priced stock can be moved significantly by relatively small trades.
I've seen plenty of 'pump & dump' take place online, usually in the Yahoo message boards. For my part, I don't even look at thinly traded stocks. I have a filter set up in TC2000 to only show me stocks that are in the top 25 percentile based on volume. That currently only shows stocks with a 5-day average volume of at least 309,500 shares. The filter also only shows stocks above $15/share (the top 50 percentile). Not that I'd ever pump any stock, but I surely wouldn't do that on some thinly traded stock. In fact, I despise such stocks. They are extremely hard to get in & out of, the spreads are usually huge, and they move on the slightest volume (which can be good or bad). Whenever people ask me to look at a stock the first thing I do is look at the volume. If it's low I just give an 'Ugh!' and toss it aside.
And to be fair pumping thin stocks happens on TV and the more traditional media too. I've seen plenty of people come on CNBC or the Fox weekend stock shows and mention thinly traded stocks. And you know the Fools do it. :-)
