When one is dealing with the stock market, he or she should be well aware of the concept of " Buy the Rumor, Sell the Fact"
This is especially true when dealing with penny stocks and small or micro stocks.
The concept is explained very well in a book and it is worth being reproduced here:
"There is an expression in the stock market that says, “Buy the rumor, sell the fact.”
It’s a lesson that all new traders should learn, because it will help them profit while avoiding selling too late.
The idea is simple. When there’s an outstanding rumor about an upcoming event for a company, investors buy in once they hear about it through the grapevine, thus pushing share prices higher.
Once the event itself is actually realized, the share price loses that upward buying pressure and the stock drops in value.
For example, ABC Inc. is likely to get FDA approval for its new drug.
The upcoming ruling is widely expected, and many investors buy in, speculating that the announcement will send the shares skyward. This starts pushing the stock upward.
Eventually, once the actual FDA approval comes out, the shares don’t spike much higher since the speculators had already run the share price up so much.
Now that the announcement is out, many of those same speculators start cashing out, putting a great deal of selling
pressure on the stock. Thus, despite the release of some very positive news, the shares actually head lower!
Examples of What Might Drive Buying Interest
• Impending patent award
• Potential dismissal of major lawsuit against the company
• Expected strong financial results
• New major customer or contract win widely anticipated
• Upcoming release of a new version of the company’s technology
• Anticipated FDA clearance
Any such widely known and expected event would gradually push share prices higher. This would have steam until, and only until, the expected event itself finally comes to pass. For this effect to actually occur, the rumor or event needs to be:
• Widely known
• Growing in probability
• Noteworthy (potential for a major impact)
• Nearing the date it’s expected to occur
“Buy the rumor, sell the fact” plays out again and again on the markets. It’s certainly not the exception, but rather the rule.
Keeping this in mind will help you identify penny stocks that may trend upward, allowing you to ride the shares up for profits.
Just make sure to escape your position before they come crashing back down to earth and to more realistic valuations.
In other words, buy the rumor, and sell the fact.