Every few weeks, I get a note from a reader about a penny stock. And when I respond, I always say roughly the same thing: that OTC, microcap issues trading for a few cents (or a few fractions of a cent) are an all-out gamble, not an investment.
But it never seems to matter. Certain people are wired to trade penny stocks because those stocks are cheap and fast-moving, dangling the allure of turning a few hundred bucks into a few thousand overnight.
Like I said, it’s glorified gambling. But hey, who am I to judge?
Instead of pointing out the obvious perils, this time I’d like to share a question from a reader that could help you penny stock investors steer clear of the obvious losers and perhaps invest more … um … responsibly in OTC microcaps.
The idea I want to riff on today regards microcap miners, a big growth industry judging by the makeup of OTC penny stock rolls. I have had a pair of questions in the past week or so about this shady little corner of the stock market, and while I won’t name specific penny stocks — it only incurs the wrath of pump-and-dumpers and oddly enough legitimizes these scandalous operations — I’d like to speak broadly about this common penny stock scam.
The idea is simple: You prey on investors who see soaring commodity prices and dangle the idea of a brand-new mine that is about to get up and running, hopefully cranking out tons of silver and gold a few years down the road.
You can see how this works — it’s the classic Wimpy scam from Popeye: “I will gladly pay you on Thursday for a hamburger today!” In other words, you give these companies the capital to build out their mining operations, and they (in theory) will eventually pay you back in spades once the metal comes out in big shiny hunks.
Here’s the problem:
Many of these penny stock scams involve no mines, no practical process to get permits or equipment to operate a mine, and sometimes not even any tangible land holdings. And in the off chance there indeed is land or a few machines, there is no guarantee that any metal — precious or otherwise — exists underground.
In other words, the penny stock scam is predicated on you buying into a mining company that has no intention of mining anything.
You might hear about a permit submission (not approval, of course) or an aerial survey (how does flying at 10,000 feet inform you about underground deposits?) or other clever ruses that indicate things are humming along. But remember that unless actual metal can be proven to exist in the ground and the actual infrastructure exists to extract it, these companies are just messing with you.
Now, with the collapse of gold prices, we might see this kind of penny stock scam roll back. But I doubt it. One reader recently wrote into highlight a penny stock miner that actually is trying the same shtick, but with copper instead of gold. It works with any commodity, really, so don’t think it’s only gold penny stocks that apply.
I won’t chide penny stock investors with further complaints about how this is an irresponsible way to invest. Heck, I waste money on plenty of things and have been known to play blackjack when the mood strikes me … so if it’s a hobby or pastime, have at it.
Just keep in mind this common penny stock scam if you must dabble in OTC microcaps.
- The latest penny stock scam unwound by the SEC: Two Arizona men cooked up a set of tankless water heater companies… then “diverted nearly 30 percent of the funds they raised to pay unrelated business expenses and support their lavish lifestyles, including the lease of luxury automobiles.” (SEC.gov)
- How do you spot a penny stock scam artist? (InvestorPlace)
- Why low volume always trumps any “analysis” of a microcap. (InvestorPlace)
- Tom Taulli reminds investors that OTC and pink-sheet microcaps are always alluring, but very often wind up worthless. (InvestorPlace)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.