Do you ever see those advertisements that promise you 100%+ return on investments? Do you ever think that maybe you should give it a try? Well save your time because most are just “pump and dump” scams. A “pump and dump” scam is when someone boasts about a particular stock just to get investors to give money to the stock. Most of these scammers use penny stocks because they are extremely liquid and will yield the highest return. Once they hype up the stock and it is up big, the scammer then sells all their shares causing the other investors to panic and sell their shares before they sustain losses. Next thing you know a penny stock that was up 50% in the morning could be down 10% or more by the end of the day.
I have subscribed to quite a few of these penny stock newsletters on the sole purpose to witness how much destruction they are causing. I have noticed that these scammers tend to hype a stock for a few weeks, making decent money for people who did follow the advice. After a few weeks have passed and the newsletter people have made a nice amount of money, they dump it. They sell at the top causing a sell-off that hurts everyone that followed the advice.
Recently, the SEC said that Rudy Ruettiger was a stock scammer. Yes, the Rudy that was the Notre Dame walk-on and who the movie was about. He agreed to pay a fee of $382,866 because of the pump and dump scam he was conducting on his sports energy drink company, Rudy Nutrition. This is an example of even nice people that you would not suspect to be penny stock scammers can be involved. Penny stock newsletters appear like they want to help you achieve wealth when really they are against you and only want you to invest so that they will be able to cash in on the stock.
Penny stocks are not a sufficient way to create wealth. In fact, most people lose money then make a profit. It is much better to stick with large or small cap stocks. Penny stocks are new companies that have no profit or very little to speak of. They are extremely volatile and can be tough to swallow if you are not used to volatile swings.
In this recession people are doing anything to get an extra buck. That is why the number of penny stock newsletters has increased since 2008. People have no jobs, little to no source of income, so they turn to scamming other people to invest their money into an unreliable company just so they are able to walk away with some money. Beside the fact, penny stocks are not the right answer to wealth for Generation Y or any age really. Penny stocks should not appear in your portfolio because it can wreck your portfolio. Stick to dividend paying, large cap/mid cap/small cap stocks that have established earnings growth and good financials.