Penny stocks do not have much liquidity and more frauds. Therefore, investors would be unable to sell their stocks when they want. As a result, the investor needs to lower their price so that buyers find it attractive. The fraud could somehow happen because low liquidity allows opportunities for traders to manipulate stock prices. In a popular trading scam, there is this pump and dump, it is a trading scam to lure investors in order to buy stock. It is to note that huge amounts of penny stocks are purchased in a period when it is on hype or on a pump.
There is actually no specific strategy in recognizing whether particular penny stocks are scams. In that case, the SEC recommends investors to follow warning signs in a company’s record. This includes SEC trading suspensions. SEC trading suspensions happen when the U.S. The Securities and Exchange Commission (SEC) intervenes in the market. The purpose is to halt trading activity regarding serious concerns on company’s operations, assets, and other financial information. Others would be large assets, small revenues and financial statements that contain rare items occurring in footnotes, odd auditing issues, and ownership.
The real example of penny stock scams happened between 2008 and 2013. It happened when California resident Zirk de Maison made half of a dozen shell companies then offered them as penny stocks. De Maison told investors that the companies engaged in a variety of businesses like gold mining and diamond. But in 2015, de Maison and seven other members were found guilty of fraud then sentenced to federal prison.
