Penny stock investing is a unique flavor of speculation. But for the record, I do not think penny stocks belong in the same sentence as the word “investing” at all … because cheap, microcap investments are notoriously volatile and trade based on sentiment and scams much more than the underlying businesses they are tied to.
Those who buy red-hot penny stocks that double overnight are quick to tout the massive profit potential in this asset class … but anyone who has been involved with penny stocks long enough knows that there are more horror stories than tales of success in this arena.
I liken penny stock investing to sex education in schools — there are a lot of resources out there that claim to protect you, but at the end of the day, the only way to be 100% safe is to simply not participate in the activity at all.
In short, you beat penny stock scammers by never playing their game to begin with.
Sound overly harsh? Well, consider the following:
Awesome Penny Stock Tips Are Too Good to Be True
Click to EnlargeThis “accidental” email I received from a supposed Apple (AAPL) employee is a great example of the kind of shenanigans that plague penny stock investors. The note, which I saved as a screenshot, touts a penny stock called Snakk Media — the exchange and ticker are NZE:SNK since the stock trades in New Zealand.
My favorite line is that “you will naturally double your money in a short space of time, but don’t invest too much otherwise people will become suspicious.”
This is the kind of unscrupulous stuff you have to put up with if you’re going to dabble in penny stocks … a stock that trades for less than 10 cents, reportedly has a tiny revenue stream of just $3.65 million based on less than 400 campaigns and — most importantly — is the clear target of pump-and-dump scammers like “Mr Inside.”
Now, I have no ill will toward Snakk Media, and I don’t know enough about the company to decide whether it will be around in 2014. The company could very well be legitimate … but frankly, that’s not even the point.
In fact, I have not researched Snakk Media at all because this is not about the company. This is about penny stocks as an asset class and the unscrupulous tactics that surround the space … so do not consider this article either in favor of or against Snakk Media stock!
Instead, consider this an article that is categorically opposed to the idea of investing in any microcap penny stock, trading in New Zealand or on the pink sheets or anywhere else.
The idea I’m trying to get at is that microcap picks trading for low prices and frequently on thin volume are too volatile for most investors — and unfortunately, are the favorite target of crooked traders because they can easily be moved on sentiment alone.
Consider the unscrupulous “stock tips” from celebrities like rapper 50 Cent on Twitter, or Notre Dame football legend Daniel “Rudy” Ruettiger, who was charged by the SEC in a pump-and-dump scheme in 2011. And more recently, read about an August penny stock bust that involved a $140 million fraud ring across 35 countries.
This is the crowd you’re running with when you go for microcap penny stocks that trade on the pink sheets.
Penny Stock Investing Is Incredibly High-Risk
Again, at the end of the day it doesn’t much matter whether Snakk is a legitimate investment that’s the unfair target of a pump-and-dump scheme, or whether the company itself is in on the penny stock scam.
Either way, those who buy in are going to be taken for the ride.
I write about penny stock investing a lot because folks are drawn in by the promise of big profits, but remember this underhanded email the next time you get a hot penny stock tip or think you found a great microcap with a compelling story.
Mobile advertising is complicated but lucrative, and it’s easy to see why a company like Snakk would be the target of this kind of penny stock investing scam as laid out by “Mr Inside.” If you can get in on the ground floor of a company that is truly cashing in on the mobile ad boom, you can strike it rich.
But let this thinly veiled attempt to pump up Snakk stock be a warning to you that every company that sounds like a great idea isn’t always a great investment.
At the end of the day, it might simply be smoke and mirrors.
More on Penny Stock Investing
- More on why I think you should avoid penny stock investing across the board. (InvestorPlace)
- Recent press on Snakk Media … though again, I haven’t verified the facts here. (Stop Press)
- The company’s investors relations portal. (Snakk Media)
- Marijuana stocks are also a playground for penny stocks scams… go figure! (InvestorPlace)
- Cheap stocks can be expensive mistakes. (MarketWatch)
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, Jeff Reeves did not hold a position in any of the aforementioned securities.