penny stock risks – Online Penny Stock Trading

The Life Of The Penny Stock Pump And Dump

The penny stock pump and dump scheme is the longest running pink sheet scheme still in practice today, but it is difficult to control because of the way it works. Since the barrier to day trading has been reduced by advances in computers and internet availability more people are becoming addicted to trading stocks and making money in this market. The newcomers to day trading are often more susceptible to manipulation because they are often following technical trading patterns laid out in books, but even more experienced traders can get caught up in these schemes.

Here’s how the penny stock scheme works:

How Penny Stocks Are Different from Other Stocks

by Charles

Stocks are simply a piece of the pie — a small piece of a corporation. They can be purchased individually from a person who owns the stock or they can be purchased from a market or exchange. In this sense all stocks are the same. Where the term penny stocks comes in and how they are different from what most people think of as stock is the level of safety.

With only so many resources available the Security Exchanges Commission (SEC) can only audit a certain portion of companies every year. While the companies wishing to be on a major exchange pay for their own independent audits as part of being on the exchange, smaller companies do not.

Penny Stock Scams

by Charles

Penny stocks are intriguing to investors because of their low value and the possibility of high gains, but with the possibility of high gains comes a greater risk of scams and fraud. Because these low value stocks can be manipulated by small groups for a profit, they are ripe for unsavory and unethical activity. If you plan on dabbling in this market, it’s important to understand some of the most common scams out there.

The most common scam or form of fraud is probably the pump and dump. Put simply this is where investors looking to cash in promote a specific stock to inflate the price of it, after they have bought shares at an extremely low price (the pump). Once the price is inflated they sell their shares and get out causing the stock prices to fall, leaving unknowing investors with virtually worthless stock (the dump).

But this isn’t the only scam in this market. Another way investors manipulate this market is through chop stocks.

Penny Stock Fraud

by Charles

Be careful because penny stock fraud is frequent and pervasive. I don’t mean to scare you away from penny stock trading, however you need to realize that many unscrupulous individuals are out there eager to exploit newbies in this field.

The SEC (Securities and Exchange Commission) estimates that penny stock fraud costs the economy billions of dollars every year. As stocks not on the NYSE or NASDAQ often do not need to fulfill the same standards to trade within Pink Sheets or the OTCBB, they can be much more susceptible to being manipulated and falsified online.

While some microcap fraud may occur on the NASDAQ Small Cap Market, a vast majority of stock fraud occurs in the OTC Market. So proceed with caution and always do your due diligence when trading penny stocks.