How to Avoid Penny Stock Scams
Since many Penny stocks or Microcap stocks that trade under $1.00 are thinly traded and have low liquidity they are an easy target for manipulation.
Penny stocks are easier to move compared to larger cap stocks which make them an easy target for scams such as the most notorious of all Penny stock scams, the pump and dump penny stock scam.
The Pump & Dump Penny stock scams
Probably the most well known of all penny stock scams is the “pump and dump.” This penny stock scam has been around forever and with the Internet it has made this scam easier to do.
Here’s how the scam works…
The individual or group (the scamsters) that is about to pump the stock buys up hundreds of thousands, or even millions of shares of the company that they are about to pump.
They then tout the stock claiming it is the latest “hot stock”. They might use websites, press releases, or send out thousands of e-mails or mail publications to drive interest to the stock urging investors to buy shares.
Unsuspecting investors buy the penny stock, causing its price to double, triple or more. Then, the scamsters sell their shares (the dump) at a profit and causes the share price to fall back down, leaving other investors holding what turns out to be a losing stock.
Penny Stock Promoters
Have you ever done a search in Google for “penny stocks”?
If so, you’ll probably notice a massive list comes up and if you click on some of these links you’ll notice many of these websites offer a free newsletter asking you to sign up for “FREE email alerts on the HOTTEST Stock Picks that will make you huge profits!”
The website will most likely have testimonials and a track-record of recent picks too!
You can find hundreds of websites offering free penny stock newsletter. So why are these free?
Well, because most of these are paid stock promoters.
Stock promoters are paid by a certain company to promote their stock, which they might call “investor awareness campaigns.” They might send out these “investor awareness campaigns” through publications in the mail or the most common way is e-mail nowadays.
The reason companies hire stock promoters is basically to create an advertisement to attract investors. The goal is of the company is to create a strong investor base so they have the funds to grow the company. Or in some cases insider shareholders of the company are looking sell their shares at high prices for their own personal gain.
What stock promoters do is almost similar to a pump and dump, but it doesn’t necessarily make it a scam as long as they disclose that they have been paid by a third-party or the company to promote their stock.
Many of these stocks that they promote end up seeing huge gains in a matter of a few weeks, but end up going back down after they are done promoting it.
Sure you can make money off of these if you get in and out at the right time, but many inexperienced investors lose money thinking these will make good long-term investments.