Analysis and Insights into the world of IPOs and investing in India

Sunday, July 2, 2017

Investors Beware #2: Penny stocks fraud


Penny stocks are micro cap stocks (Generally Rs.0.1 to Rs.9 priced stocks). This is a fraud where the fraudsters try to inflate the price of these micro cap stocks by providing misleading information to investors/traders. They try to increase the price of these penny stocks by giving the fake news.

For example, If the fraudsters want to increase the price of XYZ microcap stock, then they will send messages that a big company is taking over a that stock; or that micro cap stock is giving a bonus of 1:1 ; or A large-cap is buying 50% stake of that micro cap stock.

The fraudsters want the retailers to buy the shares of these stocks as much as possible. Let us see what the main aim of these fraudsters is.

First, these fraudsters buy a cheap penny stock at a large volume.
Then they send fake messages or emails to millions of investors/traders recommending them to buy that stock.

Those who take this news as true, start buying stocks of these companies.
Because of this increased demand, the price of that stock starts increasing.
When the share price reaches a good price, then these fraudsters sell their stocks and get good returns.

After selling their stocks at high prices, these fraudsters then stop to send email/messages to the people. Moreover, the price of these stocks becomes very volatile, as they are not worth that high price. Hence, soon the price of these stocks falls heavily and the retail investors loses their money
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