Penny stock fraud has exploded since the advent of the Internet, and is set to continue to catch out unsuspecting investors for some time to come. This article gives you the information you need to avoid falling for penny stock scams.
Penny stock scam number 1: The Pump and Dump – The most common form of penny stock fraud, countless investors have been burnt through such schemes. It begins innocently enough, with a recommendation through, for instance, email about a company which for one reason or another is a real hot prospect. The stock is going up – you can see that by looking at the charts, but it still remains affordable: it’s a penny stock. Straight away you buy into the company. With your ‘insider’ information and the upward trend of the stock, you feel confident that you are going to earn quick on this one.
For the first few days things go well: the stock increases in price just like you were told it would. Let’s say you bought it at 10 cents, and your realistic goal, according to the recommendation, is 25 cents. Quickly it reaches 20 cents and you are close to realizing your goal. Then, one day you wake up to discover that far from going up another cent or two that night, the stock has plummeted to 3 cents a share. Everyone is dumping their shares, and even at that price there are no buyers. Game over – you got scammed!
Someone got rich from this: he or she bought a large number of shares for 2 cents each, sent off the emails, and then sold them off up to the 20 cent ceiling. Therein lies the problem with penny stocks. They are unregulated, and so called research given out to the public can have absolutely no grounding whatsoever.
Penny stock scam number 2: The Poop and Scoop – This is the opposite of the last scam. False negative information is spread around the internet regarding a company in order to drive the share price of that company down. The scammers then buy fast as the stock plummets, or sell before they spread the rumors and then buy back when the price has gone down.
Penny stock scam number 3: Circular trading – Investors use multiple accounts to trade shares back and forth to make a dormant stock seem like an active stock. They then use this to bait third parties into buying into the stock, at which point they bring one of the 2 scams above into play.
If you are aware of penny stock fraud, you are in the position you need to be to avoid it. The number one tip is this: when it comes to unregulated penny stocks, be aware of any information you receive from people you do not implicitly trust, especially if they are promising riches fast.
For more information, go to:
en.wikipedia.org
