Friday, January 28, 2011

a financial backer guide to eluding small-cap fraud

By Tracy Grant


Up-to-date, accurate Information is still your best tool when it comes to investing in stocks prudently and effectively. But data on "penny stocks" stocks that trade for about $5 or less are often quite difficult to search out. Many companies that issue these stocks don't have to file financial updates with the SEC, so it's actually quite hard for potential investors to get real facts about the penny stock companys management/officers, products/services, and finances.

When reliable information is hard to come by, fraudsters can easily spread erroneous and/or misleading information about penny stocks, in the process making profits for themselves while generating losses for clueless investors. Here are a few ways to spot potential penny stock scams:

Spam is equal to Scam. It's common for fraudsters to distribute junk mail or spam in the internet. These kinds of emails contain nothing but false and deceiving information about penny stock companies which are sent to as many people as possible. If you find one in your inbox, delete it right away.

Promo Plays. Some penny stock companies pay promotions or sales firms to push or recommend their stocks in supposedly unbiased, "objective," independent newsletters, research papers, or radio, TV, and online video-streaming shows. These paid promoters are often behind the unsolicited "junk" faxes you may receive, that hawks or promotes a penny stock. Federal laws require such newsletters to disclose who paid for or sponsored them, but many fraudsters don't and mislead people into believing they're receiving sound financial advice.

Heating it up with Cold Calls. Cold calling is one of the tactics of dishonest stockbrokers. In most cases, there is a sales force tasked to cold call as many investors as possible in a day. These people push investors to deposit their cash for "house stocks", or stocks which the firm markets, acquires or keeps in its inventory. But the only purpose of this tactic is to drive up the stock prices.

Wrong Number...Or Is It Really? Beware of receiving a "misdialed" call from some stranger, leaving a "hot" or "don't-miss-this" investment tip for their "friend." Such messages are designed to sound as if the caller didn't know or realize that they were leaving the "hot tip" with a wrong number. If you get that kind of message, it's often not a wrong number at all! More likely it's from someone being paid to leave such messages to random listings of phone numbers.

PR Counts! Another clever ploy utilized by fraudsters is publishing press releases with exaggerated claims and building fabricated details about their sales, assets, market offerings, and projected revenues. These are unreliable news but are published in legitimate news portals and financial sites. An example is the pump and dump, which aggressively pushes readers to acquire penny stocks, or to sell them before prices drop down.

In general, using the above ploys, hawksters will claim to possess "inside information" regarding impending developments, or else use a so-called "infallible" combination of economic-indicator and stock-market data to pick out good stocks. But remember: Once these fraudsters have sold enough shares, the stock's price typically falls...and plenty of bamboozled investors lose their hard-earned money.




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