Penny stocks are regularly a hot topic of conversation, mostly because of the theoretical potential these companies bring.
After all, penny stock investing is the closest that many folks will ever get to buying in on the ground floor of a trade — and if the narrative holds up and a tiny company makes it to the big time, the profits will be enormous.
But sadly, penny stocks are about 99% hype and only 1% substance — and the shenanigans that surround super-cheap stocks that trade on the pink sheets make them rarely worth the trouble.
The latest glaring example: Retired four-star general Wesley Clark — who you may remember as a potential presidential candidate and leader of the U.S. Army’s operations in Kosovo — has joined the boards of 10 penny stocks in the last decade or so.
The goal, to me, seems pretty transparent: He lends his good name and the veneer of legitimacy to money-losing operations in the hope that investors will overlook ugly balance sheets and simply fall for the high-profile endorsement.
But don’t take my word for it … check out this in-depth Bloomberg report. The payoff paragraph is as follows:
“All but one of the 10 (penny stocks) lost value during Clark’s tenure. Three went bankrupt shortly after he left their boards, and the chief executive officer of one pleaded guilty to fraud. Only four of the 30,958 people in Bloomberg’s database of over-the-counter board members have served on more boards than Clark. ‘His appearance on a board is a huge red flag,’ says Joe Spiegel, whose fund, Dalek Capital Management, made money shorting the stock of one of Clark’s ventures. ‘These companies use people’s names to get legitimacy.'”
Sadly, this isn’t anything new in the arena of penny stocks and OTC market manipulation.
So if you’re thinking of diving into penny stock investing, please take a moment to review these five myths about these investments — and the hard reality of what you’re getting into.
Penny Stocks Myth #1: These Companies Have Big Potential
If you think penny stock investing is your ticket to get in on the ground floor, think again. If anything, penny stocks often offer unscrupulous investors an opportunity to unload their holdings in a company that is going nowhere — and leave you holding the bag.
After all, if they had such a great idea, wouldn’t they have sold it to someone else for billions, or held a massive IPO on a major stock exchange to raise capital and build it out?
If something sounds too good to be true, it usually is. So don’t fall for the idea that you have found the next social media giant in your favorite penny stock — because if that company really was so fantastic, wouldn’t Facebook Inc (NASDAQ:FB) have jumped at it already? After all, Mark Zuckerberg could probably swipe his credit card to cover a $10 million valuation.
Penny Stocks Myth #2: The SEC Will Protect You
Penny stocks are a playground for scams, and aren’t regulated with nearly enough scrutiny to catch all the ne’er-do-wells.