A penny stock is a security that has a very low price and market capitalization. These securities generally sell for under $5 and are not traded on the major exchanges. Penny stocks are highly illiquid and speculative, making them a high-risk investment. Investors should be prepared to lose every cent they invest in penny stocks.
Most penny stocks are initially sold at low prices because they have little or no business history and there is simply no justification for the stock to support a higher price. Also, these micro-cap companies do not have the business or resources to get back on their feet from economic setbacks. Moreover, illiquidity prevents investors from escaping if the price comes crashing down.
Penny stocks have been the center of numerous “pump and dump” schemes used to manipulate stock prices. In a “pump and dump” scheme the promoter fools people into buying a penny stock to “pump” up its price, and then the promoter “dumps” all of his shares at an inflated value. Some hackers have broken into online trading accounts and purchased these worthless securities. More commonly scammers have gotten more people to buy into their penny stocks by creating fake news and misleading advice through social media networks. For example, some celebrities have been sued for using Twitter to trumpet the greatness of a penny stock to their fans while they sold out. Positive news surrounding penny stocks should always be taken with a grain of salt.
Many brokers peddle unregistered penny stocks without making adequate disclosure. When a stock is unregistered with the SEC it is even easier to get defrauded. In early 2012 a company was hit with a substantial fine for selling unregistered penny stocks to customers who were identified as conservative investors. To add insult to injury this firm also profited from their clients by regularly trading these same securities.
Some financial institutions also abuse penny stock investors in other ways. In 2011, one of the largest brokerage houses paid millions of dollars in fines for overcharging its customers on mainly penny stocks. The illiquidity of penny stocks can make the cost of a trade over 5% of the total holdings value. The bid-ask spreads are wide and the fees are ridiculous in these small markets.
When you take a highly speculative stock, place it in a market full of fraud and then stack the fees against the investor there is little way to come out on top. Investors have been losing their shirts in penny stocks since the 1980s. Often these securities aren’t worth a penny.
If you have investment losses or problems involving penny stocks, call the lawyers at Page Perry for experienced representation at (404) 567-4400 or (877) 673-0047 (toll free).