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It is natural for the financial stock markets to fluctuate wildly. The inexperienced investors of penny stocks are the first casualty. During the bull runs, the prices of the blue chips shoot and the medium and the small caps follow. This happens to be an irresistible appeal for the investors and as the stock market upsurge is never sustained, though the sound companies stand tall, the small minnows perish along with their investors. So, the penny stock investors constantly need to read the warning signs:
The hot stock tip – Beware of the ‘hot stock tip’ by phone or mail. If you are promised fabulous guaranteed returns on some penny stock investment, be sure that you are scammed by a boiler room operation. In fact these hollow shares are scooped up unscrupulously at fractions of a penny, in an effort to sell them for a few dollars per share.
The penny stocks trades in unregulated exchange – The penny stocks do not meet the compliance and the reporting requirements of a regulated environment. Since these stocks trade over-the-counter, Pink Sheets are naturally avoided. Stocks sold over the phone or directly from the company are equally suspect.
The trading activity is erratic – Investors who have already invested in shares with an erratic trading activity, will have to stick around with them as it would be difficult to find a buyer.
The lack of reporting by the company – Financial statements are necessary in order to evaluate a company and when they are deliberately not issued, it is obvious that the company has something to conceal. The companies issuing penny stocks do not issue financial statements.
Hollow company hype – Such companies who persistently highlight their latest achievements involving the whole of media, have something fishy in them. They do not provide the details on how their revenue or profits were increased.
Even after your broker solicitated the trade, if your trade confirmation is marked ‘unsolicited’, it’s a cause of worry. It is unscrupulously done by the penny stock brokers in order to avoid the registration laws and apparently maintain a ‘fair, just and equitable’ standard. Any wrong statement regarding the investor’s net worth, income and account objectives are a warning signal.
Investors should also be cautious about blind pools and blank checks. He ought to know the company plans regarding what they would do with the proceeds and how they plan to handle the management and promoters. But all these details are just not available for the penny stock investor. Therefore, risk hangs paramount.
