Investing in penny stocks is inarguably full of risks. No wonder only a handful of full-service brokerages offer them to their clients.
There are several examples of companies listing their penny stocks that are just an inch away from filing bankruptcy. Others have notably low following with huge debts.
Despite several lowdowns, penny stocks can’t be done away with totally. In fact, some high-potential biotech penny stocks under $1 pack the punch for all the good reasons.
Firstly, they are stocks belonging to biotech companies, a booming field of research and science.
Given the rising importance of biotech globally, these industry stocks promise a lucrative opportunity for traders and investors alike.
Biotech companies are heavily engaged in researching and developing medicines, drugs, and advanced treatments.
While experiments and research studies take time, there’s always a breakthrough waiting to happen when a product gets regulatory approval or enters a worthy partnership.
Therefore, investing in biotech penny stocks can bring above-average gains quickly.
What makes it tricky is a bunch of scams that make investing in penny stocks a scary proposition.
Fret not! In this post, you will get to know about some of the most common scams around penny stocks and ways to steer clear and avoid loss.
Read on!
The Pump-and-Dump
Perhaps the most commonly occurring penny stock scan of all time, targeting first-time or amateur investors.
This is where promoters usually spike interest in a lesser-known company, where an inexperienced investor shells out money to buy the share and thereby lift the price.
Once it reaches a decent level, the promoters sell or dump the stock, amassing huge profits. The investor goes back home, dry and empty.
How Can You Save Yourself
The pump-and-dump schemes with penny stocks usually have their roots in free stock newsletters where the writer is paid well to write all good things.
So, if you’ve subscribed to a penny stock newsletter, always read the fine print.
There’s a good chance that the fine print can carry a disclosure about some financial relationship or paid marketing contract with the promoters.
The Short-and-Distort
This one’s just the opposite of the Pump-and-Dump scheme. Here, the scammers use the short-selling approach to lure investors.
So, any investor who sells short invariably bets on the falling price of a stock. He borrows a good number of shares from the broker and sells in the open market right after.
If the price drops, the short seller further scoops up the shares even lower. The lender gets back the shares borrowed earlier, and the profit goes to the
short-seller.
How can you save yourself
The scammers usually short-sell stocks to scam investors by spreading false stories and rumors about a company.
So, if you hold a stock already, don’t fall prey to such stories. Always cross-check facts before letting a stock go.
Reverse Mergers
There are times when a privately owned company may merge with a public company to avoid going through the traditional listing for trading in the stock market.
This is called a reverse merger, and that’s completely legit. However, it makes it easy for some lousy private firms to fabricate their earnings and push their stock price.
How Can You Save Yourself
It’s easy to steer clear of being a victim of a reverse merger deception. All you have to do is research the company’s history and spot telltale signs of fabrication in the way a merger is depicted.
The Offshore Trick
Companies operating outside the US are not required to register their shares within the country when dealing with American investors. This is where penny stock scammers play their cards.
Usually, they will buy cheap shares belonging to unregistered foreign companies and inflate the price to sell stocks to an investor.
When there’s an influx of stocks, it leads to companies’ stock prices going down. The bad guys make money, while the US investors get almost nothing.
How Can You Save Yourself
Don’t rely on a broker blindly. Do your own research before buying the stocks of a non-US company.
Closing Thoughts
The penny stock domain is full of risks.
However, like all good things on earth, there are still legitimate ways to make above-average gains without waiting too long.
All you need is a trusted penny stock trader by your side to guide you through the loopholes.
Now that you know about the most common types of penny stock scams, you will always reconsider things before taking the plunge.
