If you’ve been doing any kind of research into penny stocks, you’ve probably heard about a company called Lithium Exploration Group (traded as LEXG). In case you’re not up to speed on this story yet, the company seems to have been involved in one of the largest microcap stock fraud schemes in recent memory. After seeing the price of a share in LEXG rise from around $1 to as high as $11 with an unprecedented trading volume, the truth finally came out: the company had no real underlying business to speak of, no cash on hand and no revenue.
The LEXG scam may have been one of the largest scams in the history of penny stocks, but it is fairly typical of penny stock scams in its planning and execution. The usual pattern is that enormous amounts of a previously unknown company’s stock will suddenly be purchased (usually by the unscrupulous characters behind the scam), accompanied by a campaign of positive press for the company in question. You may see false information about the company disguised as press releases and news stories, on websites masquerading as reputable sources of investment information and of course, out and out advertisements for the stock online, in print and via email.
The low cost per share of penny stocks makes them especially vulnerable to price manipulation and for this reason, penny stock scams have been operated by the mafia and other criminal organizations. The prevalence of scams in the microcap investment scene has soured some people on penny stocks altogether, which is a shame since there are indeed solid investments to be made here if you know where to look – and what to watch out for.
It’s important to do your due diligence when you’re trading conventional stocks and especially so when you’re trading penny stocks. These smaller companies don’t always file with the SEC and their size makes them more difficult to research; but given the relative ease with which criminals can perpetrate fraud, it’s well worth doing a bit of detective work to get the important details about any company whose stock you’re interested in trading. If more penny stock traders had bothered to do this with LEXG before buying into the company, it is doubtful that this particular pump and dump scheme would have ever become as large as it did before being revealed publicly.
So what should you watch out for when looking for penny stocks to trade? In short, beware of hyperbole. Whenever you see something talked about in terms which seem just a little too glowing, that should be a red flag – and even more so if you see a flood of advertisements (especially advertisements disguised as news stories). Penny stocks can yield appreciable returns for the savvy investor, but even more so than traditional stock trading, let the buyer beware.