Penny stocks are shares that can be bought and sold for under $5, and often for under a penny. Because penny stocks are so cheap and the market is poorly regulated, fraudsters who prey on nave investors have become prevalent. Watch out for these scams so you do not become a victim of penny stocks fraud.
Pump and Dump
The most common scam in penny stocks is the Pump and Dump. Unscrupulous speculators will hire telemarketers and brokers to hype and sell a penny stock. Boiler rooms, spam emails, junk faxes, message boards, newsletters, and press releases are some of the channels these crooks use to spread misleading penny stocks information.
Once their positions are in place, these speculators will release glowing press releases about the financial health of this penny stocks company or some new product innovation that's about to move the industry. Paid media personnel will offer biased recommendations touting the company as the next hot stock and urge you to buy the stock quickly before the prices go up.
Unsuspecting investors will then descend on the stock in hordes and purchase them. This will create a high demand that will raise the prices drastically. Once the stock peaks, the fraudsters behind the scheme will sell their shares and stop hyping the stock. When the share price plummets, investors lose their money while the original speculators exit with large profits.
Swindlers frequently use this strategy with small, thinly traded companies because since information about the company is not readily available, it is easier to manipulate the stock.
Poop and Scoop
The opposite of a Pump and Dump is the Poop and Scoop. Here the manipulators spread false rumors discrediting a company in order to drive the price down. Once the stock dives, they buy the shares at an incredibly low price and wait for it to rebound when the rumor is dispelled. In a related scheme, fraudsters short sell the stock first before releasing the rumors. On the ensuing decline, they cover their positions at a profit.
Front Running
Another common penny stocks scam is Front Running or Insider Trading. In this case, fraudsters use inside information on a stock that's about to take off. They take large positions before the news becoming public.
Circular Trading
When penny stocks are dormant, insiders sometimes attempt to renew investor interest with Circular Trading. Using multiple offshore accounts, they will trade the same shares back and forth between their own accounts to simulate activity.
With the help of a complicit broker, they may do Cross Trade transactions. Cross trade transactions are those where chunks of stock are traded but the transaction doesn't appear on the exchange records. Once the simulated stock movement generates investor interest, manipulators will then proceed to pump and dump.
The Internet is not only being used by fraudsters to spread false penny stocks information. There have been reports of organized crime gangs in Eastern Europe and Asia who accumulate a large number of shares of a moribund penny stock. They will then hack into electronic brokerages, stealing passwords and login IDs to investor accounts.
Once they gain access to these accounts, they will buy up shares while selling their own shares, leaving their victims with drained accounts and thousands of shares of worthless penny stocks.
Author Resource:-
Nir Dotan is a writer and promoter of
Penny Stocks services, and
Penny Stocks Preferred source for the latest news and information on the best and brightest Small Cap Stocks.
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