The dangers of penny stocks

The dangers of penny stocks

So you get a hot financial tip in your email offering something called "penny stocks." They're cheap to buy and promise big profits. But if you're not careful, you could end up penniless.

The websites and emails claim you can get big returns with little investment. The truth?

"They are considered very risky stocks," says Postal Inspector Virginia Columbo.

As the stock market rises to all-time highs, investors have been buying shares of these small companies at a record pace.

"The risk with microcap stocks is they do not have to report to the Securities and Exchange Commission, which allows room for fraud and have people come in and pretend they are more than they are," says Columbo.

Regulators have been tracking this activity and have a warning for consumers: beware of many of the tactics being used to pump up penny stocks.

"You have a promoter behind the scenes, who probably stands to benefit from this or own share of this stock," says Columbo.

Those so-called promoters can blast out spam emails saying "this is the deal of the century", or the company is about to make a "major announcement", we recommend you "buy this as soon as possible".

"The promoters and the scammers that have the financial benefits to sell it will dump. The stock will drop and all of the new investors who bought all this stock will be out all of the money they just invested and it's worth nothing essentially," says Columbo.

Postal inspectors say be skeptical of email tips from strangers. Do your own homework before investing in a penny stock.

Columbo adds, "You need to be aware and go on the security scam website."

Also, if a company is not registered with the SEC, call the Ohio Department of Commerce to find out more about the company.

Click here for information on penny stocks for beginners.

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