How to Identify Penny Stock Scams
Every penny stock investor has to fight against penny stock fraud. Since market prices and trading volume are low there are multiple strategies fraudsters can use to scam investors out of their money. The 3 scams I will cover today are pump & dump scams, company message boards, and fake products. In fact, one investor, Timothy Sykes, has made a career out of identifying penny stock scams and betting against them. In this post I will cover several techniques you can use to Identify penny stock scams.
Pump & Dump Scam
Penny Stocks are micro cap companies that are trading below $5 per share. Due to a combination of little attention from media outlets and overall riskiness of investment penny stocks also have very low trading volumes compared to large cap stocks. The combination of cheap share prices and low trading volume makes penny stocks extremely susceptible to share price manipulation. The way a pump and dump scam is traditionally executed is by a series of false and misleading positive statements about the company’s health and well being. Once the price of shares start to rise (as mislead individuals invest their money into the new promising outlook of the company), initial investors sell their shares and let the new investors ride the stock price all the way back down to its original price or less.
Pump and Dump scammers have many outlets to use to reach investors and release these false statements. If you have ever seen the movie boiler room you know that telephone calls can be used to promote the products. In this movie very savvy salesman reached out to investors and told them about an amazing opportunity. They intentionally gave investors misleading information about the companies they were trying to sell. Probably one of the most hard hitting scenes in this movie was when you saw the stress it caused to one particular investor who was “duped” into purchasing a medical company. In this movie the SEC catches up to the firm and performs a raid on all the employees.
In real life a firm of this size would be pursued by the SEC because there is multi-million dollars in fraudulent activity occurring. However, there are tons of penny stock scams that never get busted by the SEC because they are simply to small to pursue. It would be like having the FBI pursue a criminal robbing a dollar store. This is why its important you learn to identify pump and dump scams so you do not get defrauded.
The only way to identify a pump and dump scam is to do your due diligence. If you are presented with an opportunity for a lucrative investment you must check the facts yourself to make a wise decision. Just because a series of very positive statements are released on a particular company does not mean its a fraud. In fact, this can be a really great thing if they are genuine. So how do you tell if the statements are genuine or fake? The first place to look is the companies SEC filings. Does the information in these statements match the information that is being presented in the new releases.
Company Message Boards
When I was younger I had a boss who was highly interested in investing in penny stocks. He liked the potential for reward, but didn’t have a clue on what he was doing. One time he told me about a company that he bought that was selling carbon credits. He told me the reason why he bought the company was from a mixture of price and a company message board. He told me that the stock was currently trading around 3/4ths of a cent and that it used to trade upwards of 60 cents not to long before he bought it.
The next piece of information he gave was pretty shocking. He told me there was a company message board where investors could go to talk about the stock. He said right before he purchased the stock an executive of the company messaged him saying that something big was going to happen within the next week. He said he couldn’t tell him exactly what was going to happen, only that it was big and it was going to be a major breakthrough for the company. After hearing how swiftly the price had recently dropped and this mysterious message board I decided to look into this company myself. I wanted to help out my boss because he was a really good guy, he was just a little gullible when it came to investing.
After doing some research I quickly uncovered that this was indeed a scam and advised my boss to unload his shares before he lost his entire investment. In this case the company was actually running a pump and dump scam (mentioned above). I wanted to bring this example to the attention of penny stock investors. It is highly illegal for executives of a public company to give inside information about a company to anyone who is going to make an investment. The first red flag for me was when he told me this executive said their are big things coming in a week from now. No executive in a reputable company would ever share that information with investors or people outside the company. If you come across a situation like this be very weary and steer clear of investing in these types of companies.
Fake Products
Often times penny stocks coming seemingly out of no where with revolutionary products that will change peoples lives. While some companies do produce those life changing products they are not particularly common and for every legitimate revolutionary product their are roughly 10 fake products used to scam investors. One way to check if product is fake or not is to use common sense. If a company has a product that just seems utterly ridiculous or to good to be true it probably is.
Lets say, company X says in a news release that their sales on a new product line have gone up 400% over the last month. One way you can check to see if this is true is to look at the the resources the company is putting into advertising the product. You can also see if they were talking about the product in previous statements. If this product just pops up out of the blue and doesn’t have any resources that were devoted to its production and marketing in previous quarters you know that their is a high probability this is a fake product or information released on the product was misleading.
Protecting Yourself From Penny Stock Fraud
Many times the fraud at the penny stock level is highly detectable. Most of these scammers make very outrageous claims and they are not as skilled at fooling people as high profile scammers like Bernie Madoff. The best way to protect yourself from becoming a victim of fraud is to research the company to make sure everything being presented to you makes sense. Make sure products are legitimate and make sure claims are real. More often then not it just takes a little common sense and some time to take a step back and really think about the information that has been presented to you. If you take the time to do your due diligence you will be able to prevent yourself from becoming a victim of fraud at the penny stock level of investment.
Stay up to date on penny stock investing by getting on our FREE eMail list!
The post 3 Ways To Identify Penny Stock Scams appeared first on StockRockandRoll.