Use the following tips to protect yourself
Penny stocks are made available at a very cheap price, usually below $5 for each share. This is the main reason why a lot of people are into trading penny stocks through Pink Sheets or Over the Counter Bulletin Board (OTCBB). But this main reason which draws people to buy and sell penny stocks also has its downside. Because of this, nonexistent companies are created to scam people.
It also does not help that to be listed in Pink Sheets, a company is only required to have a broker who will quote its share prices. They are not required to furnish copies of documents evidencing their authenticity. The potential investor will not have any access to the important information needed to make sound investment decisions because of this. Therefore, the investor must educate himself very well and research about the company.
Many people have already lost millions of dollars in penny stock trading because of one main reason: they are not vigilant and cautious enough to see the warning signs that a company might be fraudulent.
In order to keep yourself abreast with quality information, you can seek the different mediums of stock information which are: your broker, investment newsletters and manuals and trade confirmations. Before you can trade penny stocks over Pink Sheets, you must enlist the services of a stockbroker who will carry out the transaction for you.
Stockbrokers are usually the best source of stock market information because they deal with it every day. If some things are unclear to you, you can contact your broker and have it explained to you. Investment newsletters are the best source for breaking news and updated information about stocks, while manuals like Moody's and Standard and Poor are a source of comprehensive penny stock information.
Lastly, trade confirmations are usually furnished by the broker to the investor. This document will state basic information such as the number of shares purchased, background information and the ask and bid price during the time of transaction.
While the best defense that you can put up against penny stocks fraud is to be well-informed, it will also help if you know the different warning signs so that you can determine if it is fraudulent in nature. Some of the warning signs that you need to look at are: high pressure sales techniques, error-filled trade confirmations and unauthorized transactions.
High pressure sales techniques are usually employed by small companies who want the cash fast and need it bad. They will not stop at anything for you to invest in their company. You must not give in to techniques like this; there is always a catch.
If you see that your trade confirmations have errors or are mismarked, it is better to clarify it with your broker. Study the trade confirmation once you receive it, and make sure everything is correct. If you find errors, bring it up with your stockbroker and have it corrected immediately.
Even if you have a broker who will do all your transactions for you, it is always better to be on top of things. Know all your transactions and keep an eye out for transactions that you did not authorize. It may be a simple mistake on your broker's part, but it can also be something that will constitute penny stocks fraud.