So you have a little money burning a hole in your pocket. You have heard the stories. The secretary who only got stock options for her Christmas bonus, and a year later was a millionaire. The lucky guy who threw pennies at the stock market like it was a wishing well and walked away rich. Hey, you have to play to win, right?
Unfortunately, the only people getting rich off penny stocks these days are the people selling them to you. We don’t claim to know everything about the stock market here at Scambook, but we do know a lot about scammers using investment ‘opportunities’ to separate you from your money.
High Pressure Sales
Have you recently gotten a call or e-mail with what sounded like the investment opportunity of the century? If you don’t have a broker yourself, has one contacted you out of the blue? There is a good chance you are being targeted by a Boiler Room. Back in the day, this meant dozens of high-pressure salesmen sitting shoulder to shoulder calling as many people as possible and using every trick in the book to gain investors. Nowadays, they can be located anywhere in the world and can use the power of the Internet to cast their net wide via e-mail. They can also narrow their search to individuals likely to have money to invest. If they are pushing a stock for a small medical company, they might target retired doctors. If the penny stocks are for a technology company, they might target software engineers.
They will give you some ‘inside information’ that the stocks they are selling are really set to take off and if you don’t buy now you will be passing up the chance of a lifetime. People who share ‘inside information’ about stocks usually don’t tell every random person they call, for good reason. Sharing insider trading information is illegal, and a real broker would not risk jail time to get you to buy a few stocks. The truth is that these penny stock pushers are simply using you and your money to make themselves rich.
How does that work?
First, the scammers buy thousands of shares of extremely cheap stock on the OTC Bulletin Board or Pink Sheets Electronic Quotation Service. These are stock exchanges for companies that don’t meet the qualifications for the big leagues like the NASDAQ and NYSE. Then they call people like you all over the country to build hype for the stock. People buy, and the price rises, and then more people buy, and the price rises some more. The stock price doubles and triples and then shoots through the roof, even though the actual company the stock represents might not be making a dime. Right then, when the house of cards can be built no higher, the scammers cash out their thousands of shares. The stock that was worth nothing to begin with collapses back to nothing again, and all their ‘investors’ are left high and dry.
This type of scam is called the Pump and Dump. The scammers pump up the confidence and hype for the company, then dump their shares when the price is at its most inflated. If you think this only applies to penny stocks, think again. Big companies have managed to pull off a fraudulent pump and dump too. Nevertheless, it is typically much easier for a scammer to pull it off with penny stocks because they are much cheaper for the scammer to buy to begin with. They also aren’t scrutinized by the agencies that police and fact check the bigger stock exchanges, so the scammers can fly under the radar and post favorable ‘reviews’ and ‘tips’ about their stock around the Internet.
Ultimately, any investment opportunity presents a risk for loss, but these penny stock scams and boiler room tactics are a dead giveaway that the stock is a stinker. If you really want to invest your money, bring it to a real broker at a real firm. They might lose your money too, but at least you will know where to find them and who to complain to if that is the case. The penny stock pushers on the other end of a phone line or Internet connection will disappear just as quickly as your money does.
If you think you’ve been the target of Pump and Dump scam, let the Scambook community know about it and contact state or federal authorities, like the U.S. Securities and Exchange Commission.