Entrepreneurs, Be Careful to Avoid Penny Stock Scams

It’s easy as an entrepreneur to want to take risks. Penny stocks are tempting for potential quick returns but are notable for scams. Read on and be aware of the common issues with this form of trading.

Pump and Dump Scams

This type of scam happens all of the time. The scam begins when promoters begin drumming up interest of an unknown stock. Inexperienced investors pump up the price when shares are purchased. Once the stock reaches a certain price, the promoters will dump the stocks for a huge profit. Investors are then left with a worthless stock. These pump and stump scams are often found in free penny stock newsletters. The publisher pays to list these stocks and get it out to the masses. If you currently receive this type of newsletter, make sure to read all of the fine print. You may see that promoters are paying the newsletter’s author to feature the stock in the latest newsletter to help increase the profits of these stocks.

Short and Distort

This scam is the opposite of a pump and dumps scheme. With this scam, scammers short sell to make a profit. Short sell works when the investor borrows shares and then immediately selling them at a higher price, hoping that the stock prices fall so they can be purchased at a lower price. These shares are then returned to the lender and the investor makes a profit. Penny stock scammers often spread false rumors to damage the integrity of a company to get stock prices to fall. Investors who currently hold shares lose money while short sellers make money using this scam.

Reverse Merger

Sometimes a privately owned company will merge with a public company so it can be publicly traded without the expense or hassle of going through the traditional methods to begin trading on the stock market. This scam makes it easy for a private company to falsify earnings information, which can falsely inflate stock prices. Although some reverse mergers are legitimate, many are not. You can protect yourself by reviewing the company’s history and look for any spotty activity.

Mining Scams

The thought of investing in oil, gold and diamonds can be tempting. In the mid-1190s, the founder of Bre-X was David Walsh. Mr. Walsh falsely claimed that Bre-X found a gold mine in Burma. This mining scam is one of the most famous mining scams. Speculation soon soared and many people invested in the company. By 1997, the company’s penny stocks were valued at $4.4 billion. The company soon collapsed and its investors lost all of their investment money.

Guru Scams

People often fall for guru scams. These scams feature false ads that showcase how an “expert” became rich using a “secret” formula. Often these ads show lakefront homes, boats and glitzy cars. The “expert” offers to share insider trading tips for a one-time low fee. If you receive any correspondence from an “expert” that promises untold riches, run away as fast as you can. There is no one plan to invest in the stock market and become rich. You should avoid any type of offer that promises you success via a once in a lifetime invention or product.

No Net Sales Scams

This type of scam involves scammers selling shares with a stipulation that the share must be held for a certain duration of time. Investors typically purchase these stocks because they the demand for these stocks are huge. The U.S. Securities and Exchange Commission investigates these schemes; however, by the time they shut them down, the investors have lost the investment money.

Offshore Scams

Companies that operate outside of the United States do not register the shares that they are selling to investors. Penny stock scammers often use offshore scam for this reason. The scammers purchase cheap, unregistered offshore shares and then sell them to investors in the United States at an inflated price. These shares cause the stock prices to drop, resulting in huge profits for the scammers and a loss for U.S. investors. This is why you should use a tool like Robinhood and to only look at Robinhood penny stocks when considering this option to invest.

How You Can Avoid Penny Stock Scams

The penny stocks are rife with fraud and market manipulation, so it is imperative that you research each stock before you invest. Protect yourself from these scammers by following the suggestions listed below. If it sounds too good to be true, it probably is.