Sunday, May 31, 2015 11:57:27 AM
Pump-and Dump Protection:
Unscrupulous investors who try to inflate a microcap’s price so they can dump shares at the top and make a fortune — right before the price crashes again. This is most easily achieved in microcaps with thin volume, because it’s easy to move the market with a low-priced stock that trades only a few thousand shares a day. It’s an increasingly popular tactic — a Trustwave report recently showed that penny stock-touting messages accounted for “16% of unwanted email in 2013, up from less than 1% the year before,” according to MarketWatch. You can protect yourself by looking for more liquid stocks that trade on higher volume, and even then, it’s a good idea to use a limit order to prevent buying shares at a higher price than you expected.
Want to Protect Yourself? Try Reading.
Again, penny stocks are a highly risky asset class where even reasonably legitimate companies can go bankrupt. It is on every investor to do his or her own research and look seriously at microcap stocks before simply buying in based on a narrative of once-in-a-lifetime opportunities.
And remember this above all: Over-the-counter and pink-sheet stocks are still subject to SEC oversight, and by law have to file certain documentation. That is your best hope of getting the real story.
Take the hilariously named Great Idea Corp, a penny stock incorporated in 2011 that has one of the most absurd prospectuses I have ever read.
Here’s an excerpt:
“The Company was formed by Nishon Petrossian, the initial director, for the purpose of creating a corporation which could be used to consummate a merger or acquisition. Mr. Petrossian serves as President, Secretary, Treasurer and Director. Mr. Petrossian determined next to proceed with filing a Form S-1. Mr. Petrossian has no specific experience, qualification, attributes or skills to perform as a director of a blank check company nor in the acquisition of acquisition candidates.”
Got that? A guy with zero experience or skill wants to raise money to acquire another company … nice dream!
It gets even better, with clauses that allowed Petrossian sole discretion over executive compensation (just his, of course, since he serves in all four senior roles), and furthermore that “The Offering Price of the Shares bears no relation to book value, assets, earnings, or any other objective criteria of value. They have been arbitrarily determined by the Company.”
What could go wrong?
Thankfully, Great Idea Corp is no longer out there — because, as should be evident, it was a penny stock doomed to go to zero.
But it is highly instructive that a company like filed with the SEC at all.
Bottom Line
The best way to protect against penny stock losses — either through fraud or just bonehead ideas — is to actually know where the money is going. If you don’t take the time to read through documents or at least poke around the Internet, expect to get burned or ripped off.
http://investorplace.com/2014/05/fraud-penny-stocks-scams/2/#.VWsuGtm9LCQ
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