Beware of penny stocks

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One type of stock that always receives a lot of attention is the so-called “penny stock”. Penny stock was a term used to describe any stock under $10 at one time, and very few brokerages would even allow trading in them. Penny stock now refers to “sub-penny stock” in most cases. Most sub-penny stocks are sold through a privately held company known as the Pink Sheets.

Although Pink Sheets sells most of these stocks, they have some pretty significant warnings about their purchase. One of the most telling examples of the risk is:

An investment in an OTC security is speculative and involves a high degree of risk. Many OTC securities are relatively illiquid, or “thinly traded,” which tends to increase price volatility. Illiquid securities are often difficult for investors to buy or sell without dramatically affecting the quoted price. In some cases, the liquidation of a position in an OTC security may not be possible within a reasonable period of time.

Basically, when a few people buy a penny stock, the stock price goes up accordingly. For this reason, penny stocks are custom made for fraudsters who operate online. They generally search for clueless newbie investors who don’t much about the technical aspects of trading, and they sell them on the idea of buying stock. The people pumping the stocks are the ones who gain when a sucker buys.

The number of rogues penny stock websites is growing. One of the most common tricks for penny stock pumpers to use is to hype these irregular companies and stocks wherever they can find a free place to spam. Ignore all of it. When you see a stock that is selling for 1/10th of 1 CENT, you better believe you get what you pay for. It’s that “cheap” for a damn good reason. Steer clear.

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