An interesting thing about penny stocks is that, while some may consider them small change, they can be big trouble if you’re not careful.

Have you ever heard of pump-and-dump schemes?

Imagine someone hyping up a stock – they’re making it seem like the next big thing.
Hoping to strike gold, you buy in…but there’s a catch: it’s all a setup. The price is pumped up artificially, and when it peaks, those who orchestrated the scam cash out and disappear without a trace. You’re left high and dry, as the prices plummet.

Surely, this type of scenario might make you think, “Should I steer clear of this particular type of instrument altogether?” The answer to that question is – not necessarily. Penny stocks do hold the potential to offer enticing returns, but they also come with a side of significant risk.
It’s like setting off fireworks – you may expect a possibly stunning outcome, but practice safety and watch your fingers.

So, how do you avoid getting burned?

First off, know your enemy. Pump and dumpers are like illusionists, they blow a lot of smoke in hopes of selling it to you. They’ll flood the market with hype, usually using online platforms, including social media, YouTube and others playing a significant role in investment discussions nowadays.

There are things you can pay extra attention to, which can contribute to minimizing your chances of falling victim to manipulation when investing in penny stocks.

Try not to be swayed by social media influencers. Potential biases or conflicts of interest will often be hidden in disclaimers buried in fine print, and they might be just peddling snake oil for a quick buck.

Like sirens luring sailors to their doom, when the buzz reaches fever pitch, sensational headlines saturate various platforms to entice the potential investor – but if someone’s dangling a too-good-to-be-true deal in front of you, it probably is. Keep your guard up against unexpected offers.

And here’s a sneaky one: affinity fraud. These target specific groups, like religious or ethnic communities, using trust to reel you in. Don’t fall for it—unsolicited advice is often a red flag.

Watch out for warning signs. High-pressure tactics, sky-high guarantees, or claims of insider info – all of these are virtually flashing neon signs saying “Scam Ahead.”

Do your homework before getting started. Legit companies have nothing to hide, so their info should be easy to find. If it’s like searching for a needle in a haystack, proceed with caution.

Risks are best taken and kept on the right side of the law

Remember, pump and dump schemes are illegal. If caught, scammers face fines, frozen accounts, and even bans from trading. However, many will still slip through the cracks, leaving victims in their wake – and sometimes even bringing them to justice won’t guarantee restitution for those defrauded.

Ultimately, it’s all about weighing the risks. If you don’t have the resilience for the rollercoaster ride, stick to safer bets like mutual funds. There’s no shame in playing it safe, better to be a tortoise than a hare when it comes to your hard-earned finances.

So, there you have it – pump and dump schemes, the boogeymen lurking in the shadows of the trading world. Stay sharp and well-informed, read between the lines, and if in doubt, trust your gut.