Penny stocks are common shares of small public companies that trade at less than $1.00 per share. They are considered to be highly speculative and high risk and are traded over the counter and are prime targets for price manipulation. Here is how penny stock scam might operate:
Example: Mrs. G got a call from Mr. S, who told her he wanted to help her out with a "little-known" investment bonanza. These penny stocks' price could rise by 25 percent in a few months. After she was told to act before the opportunity vanished, Mrs. G invested $5,000 in the penny stocks. Result: She is still trying to get back her $5,000.
Although she was told during the first few weeks that the stock was going up, within a month the seller was not returning her phone calls. She could not check the price of the stock because penny stocks are not traded on an exchange, but over-the-counter.
Further, the price of the penny stock was not published anywhere. Mr. S's company was the only seller of these particular penny stocks and had been engaging in price manipulation. Eventually, Mrs. G. turned the case over to her attorney. Half of her $5,000 went in markup of the penny stock's actual price and hidden commissions.
Penny stocks can be a legitimate investment opportunity if you learn to be alert, but with the proliferation of the Internet, these stocks are often quite risky for the average investor. Learn the following warning signs investigate before you invest.
Warning Sign #1: Unsolicited Telephone Calls
Beware of a salesperson who promises you quick profits with little or no risk.
Warning Sign #2: High-Pressure Sales Tactics
These tactics include the following statements by a salesperson:
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The salesperson has "inside" information on a stock and that you should purchase now, before the information becomes public
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For only for a short period of time, a stock sells at a special or below market price
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Due to a series of increases in a stock's price, you should purchase immediately
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You may buy a particular stock only if you agree to buy stock of another company
Warning Sign #3: Inability to Sell Your Stock and Receive Cash
Fraudulent penny stock brokers may become inaccessible when you want to sell, or they may refuse to sell your stock unless you buy another one.
