Buyer beware. Whether you are on the hunt looking for a new car, a house, or investing money, the old adage applies across the board. Sometimes it is a lesson that has to be learned the hard way via a bad experience with unfortunate consequences, other times naivete or trickery are to be blamed for getting burned financially. No matter how it happens, it is a learning experience that will lead you to never make the same mistake again.
However, there are always exceptions to the rule, and unfamiliar territory, at least when it involves investing money, can make even experienced investors feel like newbies. The penny stock market is a prime example of investors being taken back to school for all the wrong reasons.
Buying and selling penny stocks is a thrill due to the volatile nature of the market as well as the companies who are traded or invested in on the penny stock market, which is not regulated as closely by the SEC. The Securities Exchange Commision has its hands full with the New York Stock Exchange, which makes it a very attractive market for some, and a very dangerous one for others. Manipulation of prices via the pump and dump and other misleading price inflation schemes like it run rampant in penny stock trading, and investors new and old are being taken for a ride. Whether it is due to the one-armed bandit, slot machine mentality or atmosphere that penny stocks create or the allure of get rich quick dreams, the potential for losing one or many pieces of a person’s finances or portfolio is very real.
While pump and dump schemes and other penny stock scams are not new, technology has added entirely new platforms on which they can be launched. Scams can now be hatched far more easily and include/affect more people than ever before through the use on the internet and other web-enabled devices. The online resources available to those who wish to perpetrate these scams, people who are usually referred to as stock promoters or manipulators, allow them to spread misinformation to more people far more quickly than a cold call or mailing list ever could.
The lack of regulation is mainly due to the so-called “thinly traded” notion of stocks that sell for less than a cent. Without very much oversight from outside regulators providing guidelines and structure, volatility with these stocks is the name of the game. Companies that trade penny stocks do so in what is known as the “over the counter”, or OTC market, where information about a company is limited or not as easy to find. While the SEC may halt a certain stock, the damage may already be done for some, so due diligence and adherence to the saying “buyer beware” is a necessity.
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