How To Avoid Penny Stock Fraud
Things you need to know before investing in Penny Stocks
Fraud is very common in Penny stocks. This is because it is easy to manipulate the price on these dirt cheap stocks.
Beware of high pressure, unsolicited telephone calls. The fraudulent micro-cap broker often works in a “boiler room,” a bank of telephones manned by high-pressure salespersons, working off of scripted sales pitches who tout stocks with outrageous promises. Never allow yourself to be pressured into making an investment. Don’t make an investment that you don’t understand and be wary of promises of inside information or “get-rich-quick schemes.” The best advice is to hang up the phone! Buy and use an answering machine to screen cold-calling salespersons.
Be wary of Internet chat rooms, bulletin boards or unsolicited E-mail messages. The person providing the information may be an unscrupulous stock promoter or broker, or an insider who wants to dump their shares.
Question micro-cap sales pitches featuring the names of reputable “clearing” broker-dealers. These firms often have no more than a contractual relationship with micro-cap brokers.
Check out the broker and the investment. Ask the broker for their CRD number. Call your state or provincial securities office to learn if the broker has a disciplinary record and that the investment is properly registered. Contact information is also available in our online directory of state regulators.
Ask to see a prospectus if it is a recent public offering, or other up-to-date information before you invest. Read these documents carefully. Greater caution should be taken if a prospectus is not available. A prospectus must be filed with the Securities and Exchange Commission and/or with a state or provincial securities administrator.
Anything that a salesperson says that contradicts disclosures in a prospectus or other offering materials should be a red flag that there is a problem. The following are some risk disclosures within the offering information of a micro-cap stock:
Risk Factors – Read these disclosures very carefully. These contain many of the risks that could adversely affect your investment.
Management – This information discloses the experience and background of management. Check to make sure, for example, that someone whose sole experience is as the manager of a fast-food franchise is not at the helm of a biomedical research company.
Company Financial Health – If they are not already deeply in debt, many micro-cap stock companies have little or no capital to work with. They could be using investors’ money simply to keep the doors open. Read the financial statements and accountant’s report provided. If you don’t understand them, ask someone who does — or find another investment.
Dilution – Promoters often obtain huge numbers of shares free. When the public’s money is invested, it is immediately watered down by the absence of cash investment by the promoters. The disclosures provided should have charts or information showing how much investors’ dollars have been “diluted” by the “cheap stock” in the hands of promoters. Very high dilution should be a cause for concern.
Use of Proceeds – This information tells how the money will be used, whether for product development or some other purpose. If it will be used for suspect, unproductive purposes, such as loans to officers and directors, back taxes or unmet payroll, exercise caution. Use of proceeds is the key to the legitimacy of the operation.
Product – Here the information will reveal if the “electronic asparagus cutter” has been tested and proven. Often these disclosures will contain double-talk indicating that the product is “about to be tested,” “may be tested,” or that money is being raised that will allow testing. If this is the case, particular care should be taken before an investment should be made. Read this information carefully to learn the stage of development – if any – of the “new invention.”
Transactions with Management/ Conflicts of Interest – Watch out for interest-free loans to principals and transactions where the officers, directors and promoters sell property to the company at inflated prices. This could indicate that the company is giving its money to the promoters in less than arm’s-length transactions and that there won’t be much left to develop the property or product.
Litigation and Investigations – This information will disclose lawsuits filed against the corporation and promoters and, often, government investigations. Investors may be able to obtain information on civil and criminal securities fraud actions, including the names of defendants and companies, by calling the securities administrator in their jurisdiction.
Financial Statements – Review the company’s financial statements to determine its current financial status. The accountant may have concerns about the company’s continued ability to operate.
If you have questions concerning a micro-cap security or salesperson or promoter.
Promoters always claim to have the best Penny stock Picks, but they are wrong over 90% of the time. So pleas be careful who you listen to when taking advice and buying these stocks. Make sure you can see the accuracy of the picks before investing in any of them.
Fetch realistic advice about the topic of internet marketing – make sure to go through this web page. The time has come when proper info is truly only one click away, use this chance.
Related posts: