| If you are like me, you have probably received | | | | able to sell his shares. However, the people who |
| dozens of emails about stock tips where a certain | | | | bought the shares are now holding them and guess |
| stock is set to skyrocket in price, and you have to | | | | what happens? That's right, because the shares were |
| get in now or the deal of the century is going to be | | | | in reality worth hardly anything (maybe $0.10), the |
| gone, etc etc. I'm naturally a cynical person, but if I | | | | share price drops to where it should be, and many |
| had a great stock tip, the last thing I would do would | | | | greedy people have lost a lot of money and now |
| be to share it with a bunch of strangers. | | | | hold a lot of shares they can't get rid of. Shady |
| Unfortunately, the internet has allowed a scam | | | | doesn't care, because now he doesn't have the |
| involving penny stock to flourish where many people | | | | shares and may have made a little profit. |
| get suckered in and end up losing a lot of money. | | | | Need Proof? |
| The purpose of this article is to outline how the scam | | | | I used to get a lot of these types of emails, and I |
| works and how to avoid it happening to you. | | | | never paid any attention to them. One day I decided |
| First, the basics | | | | to do a little bit of research and see for myself. I got |
| Before I go on any further, I feel I need to give you | | | | an email that said something like "company XYZ is |
| a quick run down on how the stock market works. | | | | currently at $0.13 and is forecasted to reach $0.30 by |
| In simplistic terms, the stock market is driven by only | | | | the end of the month". This would have given me a |
| two major factors: Greed and Fear. However, in our | | | | profit of over 100%. I went to BigCharts.com, which |
| case here, the law of supply and demand is more | | | | is a website that allows you to see a chart of |
| relevant. If more people want a certain stock than | | | | virtually all stocks traded all over the world on all |
| there are people willing to sell it, then the price will | | | | markets. I entered the details of the company and lo |
| rise. If there is an abundance of the stock and no | | | | and behold, the price really *was* $0.13 (or very |
| one wants to buy it, the price will fall. Pretty simple, | | | | close to it). Was the email true? Well, technically it |
| wouldn't you say? Time to read on to the next step... | | | | was, but it didn't tell the WHOLE story. I looked at |
| The scenario | | | | the history of this penny stock and found that six |
| Let's say Shady McInvestor has a packet of penny | | | | months ago, it was trading for well over $0.90, which |
| stocks in ABC company, a small-cap mining company. | | | | means that it has lost over 85% of its value in the |
| He bought them at $1 each and they have now risen | | | | last six months...why would this be unless the |
| to $2. Great! He thinks he's doubled his money, but in | | | | company was lousy and was heading into |
| reality he hasn't, as he needs to actually sell the | | | | bankruptcy!??! Quite likely, this email came from a |
| stock before he realises a profit. So, he puts his | | | | person (or company) looking to offload a lot of |
| order in to sell his shares at $2. A bit of time goes | | | | these soon-to-be worthless shares and were sending |
| by, but no one actually buys them. He drops his price | | | | out these spam emails with supposed inside |
| to $1.90. Again, no one buys them. He drops them | | | | information to make you think the share price was |
| further to $1.50, yet no one buys them. Suddenly, his | | | | going to go through the roof and it would hopefully |
| huge profit is dwindling because no one is buying | | | | generate a lot of interest. |
| them. This is what commonly happens with penny | | | | How to avoid getting scammed |
| stocks because they are not very "liquid". His first | | | | The easiest way to not get scammed is to simply |
| mistake was buying shares at $1.00 each, when in | | | | not reply to these emails and hit the delete key. |
| fact they were extremely overpriced and in reality | | | | What makes you think that you are lucky enough to |
| were worth only about a tenth of the price. Many | | | | get this information? If it sounds too good to be |
| savvy (or smart) investors and traders would be able | | | | true, then it probably is. If you are little more savvy |
| to do a little bit of research into ABC Mining company | | | | in your investment decision-making, you can always |
| and easily determine that the fair price for the shares | | | | investigate the stock yourself (you can't lose money |
| would be only about $0.10, so why would anyone | | | | just by looking!). More than likely, if you were to get |
| want to buy them at a much higher price? Shady's | | | | a chart of the stock, you'll find that the share price is |
| now desperate to get rid of them, but how can he | | | | on a huge downtrend and is now worth only a |
| do it if no one is interested in buying them? | | | | fraction of what they were worth a year or so ago. |
| Therefore, he needs to somehow drum up interest in | | | | If a company loses 90% of its value in less than a |
| these shares. This is where the scam comes in, so | | | | year, wouldn't you think that something is wrong? |
| read on! | | | | However, if the chart still doesn't convince you, talk |
| How the Scam Works | | | | to your broker about ABC Mining Company (or |
| By now, the share price has dropped to only $0.50 | | | | whatever company the email mentions). More than |
| (still over priced) because no one is interested in | | | | likely, your broker can give you all sorts of |
| buying, and the huge profit that Shady McInvestor | | | | information on the company, but he/she can also |
| had is not only gone, but his losses are growing each | | | | give you his/her opinion of the investment. |
| week, and he is worried that he may lose all his | | | | In the end, making up this type of scam is not only |
| money in penny stocks that are going down in price. | | | | unethical, but is also highly illegal. Unfortunately, many |
| He needs to make these shares look like a great | | | | people still get scammed through things like this and |
| investment so other people may want to buy them. | | | | end up losing thousands of dollars, all through greed. |
| This is where it may become familiar to you and your | | | | What's worse is that those who come up with these |
| email inbox! | | | | scams may end up making a huge profit. believe it or |
| He sends an official-looking email (one that looks like | | | | not, many of these scams don't originate in places |
| insider information!) to 10 000 (or more) people, | | | | like Nigeria, but are in major cities such as New York, |
| saying something like: | | | | London, etc. |
| The current share price of ABC Mining company is | | | | I don't want to discourage you from penny stocks, |
| $0.50, but is forecasted to reach at least $2 or more | | | | nor do I want you to think that this is the way all |
| due to (insert an official sounding reason here). This | | | | penny stocks work. Far from it actually. Most |
| means a return on investment of 300%!" | | | | small-cap companies are merely trying to raise |
| Suddenly, if someone is given this supposed "insider | | | | revenue for research through selling shares in the |
| information", they will consider buying the stock. | | | | company the same way all large companies do. They |
| However, if a lot of people are duped by this email | | | | do it legally and ethically, and can actually give |
| scam, there will be more interest in the stock and | | | | investors a large return in some cases. But you need |
| more people are likely to want to buy it. This will | | | | to know that these types of scams are out there! |
| cause the share price to rise because suddenly more | | | | Now that you know how to protect yourself, don't |
| people want to buy it. Before you know it, the price | | | | get caught out by these scams. If possible, report |
| has risen to over a dollar, and Shady McInvestor is | | | | these to the local authorities or at least your ISP. |