Be investor savvy: Don’t fall for one of these penny share scams

Julie Brownlee, Fsp Invest, 31 Jul. 2014

Tags: penny shares, penny share scams, scams, investing, investing in penny shares, penny stocks

Penny shares give you the opportunity to make large gains. These small companies might have the product that’s doing to be the ‘next big thing’ or fill a much-needed niche.

But with penny shares comes a downside. Particularly in larger markets, there’s the potential for penny share scammers to pull the wool over investor’s eyes.

Read on to uncover two scams to watch out for…

Penny share scam #1: The short and distort

What happens with this scam is scammers short sell a share. They then go onto spread damaging rumours and lies about the company. This leads the share price down, Kyle Anderson in Money Morning US explains.

The investors who believe in the future of the company hold on. The scammers make their money as the share price plunges.

This scam doesn’t only affect penny shares. But penny shares feel the impact of such a scam more than a bigger company would.

When you’re investing in penny shares, make sure you do thorough research first. If there’s a chance a company couldn’t withstand this sort of treatment, avoid.

Penny share scam #2: The mining scam

Companies that deal with precious metals are home to some of the biggest scams on record.

Top of the list is Bre-X in the 1990s. The company’s founder claimed that Bre-X uncovered a massive gold mine in Indonesia.

In 1995, the company said it had 30 million ounces of gold. Two years later, this ballooned to 70 million ounces.

This led the market capitalisation of the company up to $4.4 billion. Just a couple of years before, its shares were in penny shares territory.

It turned out that there wasn’t any gold in the Indonesian find. Once investors found out about the false claim, the company went bankrupt. The majority of investors lost their money.

What these scams highlight is the importance of doing your own research. Don’t let someone else convince you of a company’s merits until you’ve done your own due diligence.

There are some great penny shares out there. If you take your time to conduct research and analysis, you have the chance to uncover some of these.

So there you have it, how to be investor savvy and not fall for a penny share scam.

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