Everybody loves an inside deal. Privileged information that puts you in the know, ahead of the other guy. Especially when it has something to do with trading stocks.
Imagine that one day you get an email from someone, a firm perhaps, who claims to know about something exciting within a company you’ve never heard of. It has a stock symbol, and the email quotes recent prices along with potentially earth-shattering news of a new product, a management change or a merger. They’re recommending a “buy,” and soon.
You look up the stock, finding it on an OTCBB (Over The Counter Bulletin Board) quote provided online or from a small brokerage firm. And sure enough, the stock is trending upward, and quickly. But it’s still priced very affordably, possibly less than a dollar per share.
It’s a penny stock
And with not all that much money, you can pick up a bunch of it.
Exciting stuff. You have what seems to be credible insider information, and the movement of the stock verifies it.
So you make your move. You buy a few thousand shares. Which sounds like a big deal, but at, say, 22 cents per, it’s not that much capital. You set a goal of about 50 cents per share, which is in line with what the email said would be a modest target. Double your money in a week or so.
And so you wait. The stock goes up. To 30 cent. To 35 cents. To 38 cents. Word is getting out there. You’re smelling the money, planning that trip to Las Vegas with the proceeds.
And then, the stock slows
You wait, it’s only at 40 cents, and you want that 50 cent goal. And that’s when it hits.
The next day the bottom falls out. It’s trading at 8 cents per share. Because everybody is selling. And there are no more buyers on the horizon. Even though the going offer is 8 cents, there’s no stock there.
You’re stuck. You’ve just been scammed, and by a professional. One who probably bought the stock at about 4 cents per share over the past months, a stockpile of it, and has been the selling entity all along to investors like you at prices all the way up to that 40 cent ceiling.
They got rich doing it. While you got scammed, still holding it
It’s called the “pump and dump” scheme, and it’s been around for years. With the advent of email it’s even more prevalent – the SEC says that about 15 percent of all email fraud involves some time of stock scheme.
Penny stocks sell at that level for reason. They are non-listed, which means they are largely non-regulated, especially when it comes to so-called “research” released to the public. Because these companies are so thinly capitalized, they are also thinly traded, meaning liquidity could be as big a problem as the safety of your investment.
If it looks too good to be true, and if the provider of the inside information isn’t someone you know and trust – and even then, tread carefully – stay away from penny stocks and any claims of an immediate upside. Your odds are even worse than that trip to Vegas, since there you at least have a shot at red or black on every role.
Which these pump and dump crooks, you don’t have a shot at all.
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