Penny Stock Online Frauds

It is becoming more and more common to research about penny stock online. After all, the World Wide Web is a veritable treasure trove of penny stock newsletters, guidelines, lists of hot stocks, and everything else that a prudent would-be investor may want to check out before picking his shares.

Unfortunately, not all that is advertised about penny stock online may be legitimate. One thing to watch out for on the Internet is a flood of e-mail spam promoting certain penny stocks. In fact, an Oxford study yielded these results: 15% of all penny stock email spam was linked to fraud. The study also discovered that those who actually responded to this scam lost 8% of their total investment in as short as two days. The modus operandi for this fraud turned out to be that the spammer would invest in these low-priced stocks, and then flood a lot of people with these emails. Many would ride on the hype, buy the stocks, and the spammer would earn a return between 4.9%-6% upon selling.

Another method of penny stock online fraud is through company web sites. In them, you might find some tantalizing reviews about its new products or discoveries, or even its financial state. Online newsletters or articles that would give previously untainted reviews would suddenly promote a certain company as the hottest stock on the market. Even chat room and blog postings frequently pump up the hype about a particular stock, telling you that from reliable sources, one must urgently buy or sell. This works for them in the sense that many investors, carried along by all this promotion, purchase that stock frantically and in huge amounts, thus contributing to its popularity. This makes it look for a while like the hype is real, but once it gets to the peak, the people behind the fraud suddenly sell their shares, drop the hype, and the whole thing crashes with many victims. Because this particular ploy has been used more than once, it has become known as the “pump and dump” scheme, and yet still manages to draw in unwitting or beginning investors every now and then.

Some sites or newsletters, while not involved in the previous scheme, may also issue press releases about the wrong stock or sensationalize certain ones because they are being paid under the table by their corresponding companies in order to help bring up their weak stock. This is not even limited to news articles, but may be posted on message boards or forum discussions in tantalizing formats of anonymous hints that entice its members to buy the stock immediately.

Another popular fraud scheme is selling chop stocks. These are shares that are illegally dealt overseas or to local retail investors. Some of these may be advertised as penny stock online but turn out to be fraudulent.

With the increasing risk of such penny stock online frauds, one must take precautions by checking the background of the hyped-up company- if it turns out that little information can be found, then there is a greater chance that it is fraudulent.