In the stock market, there are corporations with market capitalization in billions, and there are modest companies with smaller operations. These small-cap companies usually trade in pennies, hence the name penny stocks. Penny stocks trading can be dangerous business and if you are not careful, you might end up penniless.
The next Microsoft
Some investors are lured into penny stocks with the belief that penny stock companies will evolve into billion dollar corporations. While it’s not impossible, the chances of penny stocks turning into another Microsoft or Wal-Mart are highly improbable.
Get rich quick
Imagine buying 1,000 shares for $0.50 and then selling them at a later time for $5. That’s the reward promise that penny stocks offer. Unfortunately, not all penny stock investments realize their potential. And many investors end up with more losses than profits.
Finding a penny stock company that is well-managed is difficult because full disclosure is almost non-existent and the rules that apply to penny stocks are very sloppy. Companies are not mandated to file their annual reports with the Securities and Exchange Commission (SEC), and the requirements for listing are limited.
The penny stocks broker
Successful companies don’t need ghost writers to talk up their stocks. Penny stockbrokers often engage in marketing gimmicks such as cold calls and targeted selling. They usually have a list of leads, often listing people who are vulnerable to buying into poor investments.
The stockbrokers will usually call prospective targets and introduce a particular penny stock. About a week later, they will ring again saying the stock is about to shoot up, promising returns of up to 1000 percent. This is often referred to as pumping getting as many share buyers as they can through newsletters, emails, and message boards.
Then, when the investors start buying the stock, the company and its cohorts will resort to dumping selling all their shares and leaving investors with penny stocks that nobody wants to buy.
Wrongful representation
Decent penny stocks companies sometimes find their stocks the victim of operations and scams by dodgy penny stocks brokers. These wolves make false claims that “insiders” have said a penny stock’s price is about to shoot up. When these brokers have dumped their stocks, they would not only have ripped off the unsuspecting buyers; they would also have besmirched the company’s reputation.
Target for fraud
If you’ve had a history of poor investments, brokers will look to continually pounce on you. They will not stop calling until they get your check. Once you buy their shares, they will stop calling and may even change their contact number. Many of these dubious characters records show violations, but since they’re such good salesmen brokerages continue to hire them. Dishonest profits are one reason why there are still many penny stock brokerages in business.
Regulation of the penny stocks trading system has not been entirely successful. Because of their low price, penny stocks vulnerable to manipulation. A few cents per share can mean a lot of money, especially if you are a majority shareholder.
The electronic age has also offered a whole new vehicle for brokers to cheat. For every website that discloses frauds, there are hundreds of others luring gullible investors. The best way to avoid getting swindled is to be on guard against con artists.