Penny stocks are low priced stocks and are generally traded in the over the counter market. Although the Securities and Exchange Commission (SEC) has defined penny stocks on the basis of the share rate (lower than $5.00 per share) and are defined as penny stock irrespective of the listing of the stock. The penny stocks are generally offered by a company having less than three years in business and have less than $5 million net tangible assets or a company has at least three years in business and has under $2 million net tangible assets or a company has $6 million revenue for three years
These stocks are high risk due to various reasons and fraudulent measures to sell the stock to the people are one of the risk factors. Sometimes a few market makers control the stock and thus adopt the fraudulent activities such as spam and phone calls.
Role of Brokers or Market Makers: In the recent past the fraudulent activities of some of the brokers or market makers has been noticed by people and reported to the Securities and Exchange Commission of United States.
When a company offers a few market makers to sell or buy the penny stocks of the company, they may hype about the company and mislead the investor into buying. Since all the stocks of the company will be in the hands of a bunch of people, these people can control the stock prices.
Since the company pays for dealers or brokers to sell the stocks and for getting more money, the broker or dealer could adopt fraudulent methods for selling the stocks. The dealer or broker will generally contact you over phone and hype the stocks. Sometimes the dealer or broker can use email to convince people as well to buy. The people who do not have resources to verify the particulars of such emails or such phone calls easily become victims.
Sometimes the dealer or broker may offer free stocks and after manipulating the prices can ask for more investment in a specific penny stocks. This may be one of the techniques to lure people but you should avoid taking free penny stocks. Sometimes pamphlets or free newsletters can be offered but these newsletters should be avoided as they may contain misleading information. Some brokers may ask you to make an investment quickly but you should avoid quick decisions, as in most cases this technique could be part of the fraud.
It is important to know how to invest in penny stocks to protect our assets. You should go through the prospectus of the company and see all the particulars including risk factors very carefully. Penny stocks listed on the pink sheets are high risk and you should check these stocks before investing in them. You should enquire about your broker from the state office of the Securities and Exchange Commission before dealing with any broker.