When it comes to trading penny stocks, unfortunately you are bound to notice something that seems unusual, shady, or downright strange during your research. Learning how to identify a penny stock scam and ways to protect yourself from being victim to these scams is essential.
Today we will look at a few popular penny stock scams to be on the lookout for, as well as ways to avoid falling victim to these unfortunate experiences and losing thousands of dollars or more.
Here are the Most Common Penny Stock Scams We’ve Come Across:
The Guru Who Will Teach You to Be a Millionaire Penny Stock Scam
These sites seem to be popping up across the internet more and more each and every single day. A “guru” or “expert” or “self-proclaimed penny stock millionaire” promises you riches and wealth all through penny stock trading.
You can spot these scam artists relatively easily, because they typically have huge egos and a lot of materialistic motives. Their website most likely features mansions, beach houses, palm trees, fancy sports cars, and any other “wealthy” symbol you may imagine.
They prey on you by charging some ridiculous amount for “training” or “insider access” – whether it’s just 4 easy payments of $197 or a monthly subscription fee of $29.99 a month or more, they make far more money from their “student victims” than they may ever make on the stock market. They may also make money by influencing their students to make purchases which may support their own stock market position or require you go through a certain broker from which they receive a hefty commission on each trade you make.
Perhaps the most dangerous thing however is they teach you to not think for yourself, never sharing the true “secret” to developing your own strategies – after all, it is far more profitable for them to have you feel dependent on them for your penny stock picks. They can cause you to develop quite terrible trading philosophies and habits which may end up costing you everything in your portfoliolo.
How to Protect Yourself: If anyone promises you riches, RUN! There is no such thing. You have to learn to think for yourself, develop your own strategies, practice these strategies through online stock market simulator games, and lots of trial and error – and even then you may still fail. There is no “one-size-fits-all sure path to financial success” in the stock market.
Free Penny Stock Newsletters Scam
This is an extremely important scam to be wary of, especially if you are new to penny stock investing. Chances are you are interested in the top hot penny stock picks, and you want to find out what they are so you can invest in them.
Unfortunately, as well all know, anything that sounds too good to be true generally has a catch.
With free penny stock picks newsletters, you will be given plenty of stocks that appear promising to invest in. What you may not realize however, is these “stock picks” are not influenced by data or any type of technical analysis, but rather by whoever pays the person running the newsletter to feature a certain stock.
If you read the fine print of the stock newsletter website, you will likely see that they disclose they may receive compensation from companies or promoters. Oh geez. Here you’re just getting a list of stocks which are “hyped up” with hopes you will buy them and artificicially inflate the price, and it is very likely the stock will drop dramatically in price never to return to this inflated price causing you to lose all of your money.
This is called “pumping and dumping” and we’ll talk about that next.
How to Avoid This Scam: Simply don’t subscribe to any free stock pick newsletters. Instead, learn to do your own research using technical analysis to picks stocks to invest in and formulate your own stock market investing strategy.
The Pump and Dump Penny Stock Scam
Recently I wrote an article about how pump and dump penny stock scams work. Sadly they are extremely popular, and despite the best precautions one may take they can still cause people to lose a lot of money on the hope that the next big thing is about to “break through”.
In this scam, a stock is promoted very heavily and “pumped up” by creating false buzz and excitement. Then, within a few weeks or months, the scammers dump their shares, causing a massive drop in prices where all the investors lose everything with no hope for prices to ever return.
How to Avoid: We believe if you are going to invest in penny stocks to choose stocks which are traded on well-known reputable markets (ie: NASDAQ) – while these stocks do not actually trade for pennies, you can find some decent choices for under $10 a share often times which will give you far less risk than trading on OTC or through Pink Sheets, which are not as well regulated. You also definitely need to do a lot of research on a penny stock company to ensure they have capital and a well organized company structure.
The Short Sell Penny Stock Scam
While it is perfectly legal to short sell a penny stock, and many times advantageous to do so, there are people who basically are the opposite of “pumpers” who go on a mission to make stock prices plummet so they can profit from shorting the stock. For example, they may bring a lawsuit against a company, post defamatory content online on social media websites, or even go as far to reporting a company to be investigated by the Securites and Exchange Commission (which will cause a massive price drop) all so they can short sell and profit.
How to Avoid: Beware anyone who sells “short sell penny stock” newsletters – they likely have an ulterior motive or unethical method of getting these stocks to decrease in price. Also, be watchful of the news and always do your research on a company when short selling penny stocks.
Reverse Merger Penny Stock Scams
A reverse merger allows for a company to become publicly traded without the traditional hassle and expense of going through traditional methods. This makes it quite easy for these companies to falsify earnings and makes it possible to inflate stock prices as desired.
How to Avoid: Always research the history of a company prior to investing. If you notice anything unusual related to merging with another company, it is quite likely this is a reverse merger which may only spell out trouble for you.
The Hacked Into Online Broker/Overseas Broker Account Scam
We have stressed the importance in choosing a reputable broker for trading your stocks online. There are some companies which will straight up just take your money for whatever reason (depending on their policies) – then there are others who simply get hacked into and you’ll wake up to find your well performing stock portfolio to be absolutely terrorized and annihilated to the point you’ve lost everything.
How to Avoid: Choose a reputable stock broker. Be sure you read ALL OF THE FINE PRINT in the terms of service. Understand what fees they charge and when. Be aware of penny stock trading rules and day trading rules which may affect your ability to purchase or sell stocks. See if your stock broker provides any insurance or protection in the case something terrible might happen.
The “Potential Profit” Penny Stock Scam
Imagine a company which claims to have “invented” a teleportation machine – now they simply need to actually build the prototype, test the product, and start selling it. Wow! Can you imagine the possibility with that if it would come to fruition? There’s just one problem…they don’t have a product yet. They don’t even have a prototype – there’s not even proof their theory on how it might work exists, not to mention what testing and government approval processes it might need to go through – then they need to make it marketable and be able to sell to people.
Yes, it’s easy to get excited by hype – but you cannot go after something on the possibility of potential profit alone – especially in cases where something like this may be purely speculative.
How to Avoid: Be wary of anything too good to be true, rapidly increasing stock prices seemingly overnight, and anything else than seems to make a lot of grandiose promises. Be especially wary in sectors such as alternative energy, technology, and healthcare – though honestly almost any sector could be at risk.
There are a LOT of scams out there related to the stock market. Knowing what they are is half the battle – by following our tips on how to avoid these scams you can hopefully avoid falling victim and losing everything.
Have any thoughts on penny stock scams? Share your experiences and comments below.