SCAMS BULLETIN Host Jay Wwhite is an inactive attorney in San Mateo County, California.

A Free Public Service

November 1, 2023

PENNY STOCK SCAMS

Attribution: scambusters.org

Penny Stock Scams: How They Work and How to Avoid Them.

There’s big money to be made from trading penny stocks. But a lot of it is by scammers.

Every year, investors hunting get-rich-quick opportunities, lose millions of dollars buying and selling penny stocks – actually called micro-cap stocks and referring to equities selling for under $5 apiece.

They’re risky at the best of times but the lure can be overwhelming. Why? Simply because if you bought one for literally one cent and the price went up to two cents, you made 100 percent profit.

The root of the trouble is that trading these cheap equities on what are known as over-the-counter (OTC) markets is not nearly as tightly controlled as regular stocks are on the likes of NASDAQ and the New York Stock exchange.

For example, xyz Technology was a penny stock that soared over 25,000% in 2014 despite having no assets, revenues, or operations. The lack of financial information on the company made it impossible for investors to know whether the price was justified. The stock eventually crashed back down over 99% from its peak.

Unlike larger, publicly-traded companies, penny stock companies are not required to file detailed financial statements with securities regulators.

Pump and Dump:  

Price manipulation, more commonly known as pump and dump schemes, as we know, fake news is easier than ever to create and spread. Scammers repeatedly talk up the prospects for a company after buying its stocks from the bottom of the price barrel. Investors pile in as the price soars, then the crooks sell their holding.

Often, fraudsters use high-pressure sales tactics, calling potential victims and spinning a web of lies to try to talk them into buying their stock.

They also spam their potential victims, sending out multiple emails every day. Or they may issue legitimate looking newsletters and posts on social media.

Large-scale scammers even employ and pay people to spread their lies.

How to Avoid Penny Stock Scams:

It’s probably fair to say that the lower the price of a penny stock, the greater the potential for a big fat profit – but more likely a big fat loss.

Don’t let that happen to you by taking the following steps:

Thoroughly research any company you’re thinking of investing in. If big chunks of information are missing, that’s a red flag. Check for proper licenses/registrations and look on consumer protection websites for alerts. Verify growth claims.

Another red flag:

Promises of guaranteed high returns with little or no risk.

Only invest in companies with audited financial statements from reputable firms. Focus investment decisions on company fundamentals rather than ads.

Hang up on boiler room operators. You’ll know them when you hear them. They make unsolicited calls to push specific stocks and often claim they have valuable inside information.

Be skeptical of unconfirmed news reports of market-moving activities. Be especially wary of newly launched financial websites.

Don’t be influenced by “friends,” message board acquaintances, and family members claiming they’re in on a good penny stock deal. Still do your research.

Don’t provide any personal financial information to someone you don’t know and don’t fully trust.

Beware of statements saying a stock has been checked and approved by the US Financial Industry Regulatory Authority (FINRA). They don’t do that.

Learn more by visiting their website (finra.org), which also has a searchable database of legitimate stockbrokers.

Finally, and importantly, take advice from a trusted financial professional before making any investment decisions. Scambusters does not provide financial advice. The less you know about a stock, the higher the risk you’ll lose money. Most likely, professional advisers will steer you away from penny stocks.

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