Preventing Penny Stocks Fraud

Penny stocks are the type of stocks that are traded in Pink Sheets and OTCBB (Out of the Counter Bulletin Board) – listing services that are not part of NASDAQ because they are not able to meet the financial requirements to be part of public trading arena.

They are called penny stocks because their prices are usually within the range of $5. Small companies with less than $250 million capital are the usual companies found in these trading areas.

There will always a good opportunity in penny stocks. Since the price of the stocks is less than $5, you can acquire a substantial amount of share from a good company. If the company would improve considerably, your portfolio will increase exponentially.

It could take a long time before this is realized but if you stay still to a reliable company with a great potential, the earnings are considerable with the ability to address inflation.

Potential Danger

If you have started in penny stocks, you will be able to meet different brokers who will try to persuade you into buying stocks from them. They do this in the effort to increase investors and ensure company success. This cause is of course, good and it will also help you improve through your stocks.

But not all brokers and market makers are the same. Some would resort to dirty tactics to trick you into buying stocks from them. The following are the “techniques” they use to trick you and other investors to buy stocks from their company:

• Chop Stocks – In this scheme, the brokers themselves purchase the stocks in a considerably lower price and sell them exponentially higher. They are often paid by companies to do it just to jack-up their prices and gain interest from other investors.

The company’s performance and output are disregarded as the company only focuses on increasing the price per share, sell them and get out before everything will go down.

• Pump and Dump – Almost similar to chop stocks but this time, brokers and the company provide false information to investors. By providing information of a well performing company, interest will naturally be gained and the price per share will increase.

If they provide enough information, they could generate a profit by selling those stocks and again, get out before everything goes down.

• No net sales – By purchasing shares from a company that practices “no net sales”, you place your investment in a dead end scenario. Although you could buy from them, you are not allowed to sell.

How to Prevent Potential Fraud

Because of the prevalence of potential fraud, an investor should not just invest in any company that looks good online or has generated a good buzz in the market. It is always smart to dig deeper for information.

If you cannot find any information about the company, it is better to walk away from them rather than risking your hard earned money only to lose them in the future.

Most start-up companies nowadays are tech related. That means they need investors for their website as they provide online services for different purposes.

Before you can invest, you can check popular blogs about these companies as they would usually gather interest from tech bloggers.

But the best source of information to check if the company is legitimate is to get in touch with SEC (Securities and Exchange Commission), NASD (National Association of Securities Dealers) and NASAA (North American Securities Administrators Association).

These websites will provide you with the latest news which companies and brokers have had trouble with the law in terms of penny stocks fraud. Information is usually available online so you can get them in no time at all.