Penny Stocks Help

The following suggestions may be of help to anyone who decides to play the high-risk penny stock game: 

The Prospectus:

Don't give in to sales pressure, request a prospectus and read it! A prospectus contains the full disclosure of facts about an offering. It's required to be filed with the Pennsylvania Securities Commission. (In a private deal the document is sometimes called an offering circular or offering memorandum and contains much the same information as in a prospectus.) Sales pitches may contradict disclosures in the prospectus and should be a red flag. Following are some sections of the prospectus that disclose risks involved in a penny stock offering: 

Beware of high pressure, unsolicited telephone calls:

Fraudulent penny stock brokers run a "boiler room", a bank of telephones manned by high pressure salespersons who tout stocks with outrageous promises. Beware of claims a stock will double soon, and demands of on-the-spot decisions to buy a security. Suggestions that the broker has inside information or that manipulative techniques are being used to raise the stock's price should be viewed very suspiciously. They are danger signs of the penny stock game in which many buyers are the losers. 

Management:

This section tells the experience and background of management. Check to make sure, for example, that someone, whose sole experience was as a railroad engineer, is not at the helm of a biomedical research company.

Company Financial Health:
 
If they are not already deeply in debt, many penny stock companies have little or no capital to work with. They will be using investors' money simply to keep the doors open. Read the financial statement and accountant's report in the prospectus and, if you don't understand them, find someone who does and can explain it all to you. 

Transactions with Management/Conflicts of Interest:

Watch out for interest-free loans to principals, transaction where the officers, directors, and promoters sell property to the company at inflated prices. This could indicate that the company is giving its money to the promoters in less than arms-length transactions and that there won't be much left to develop the property or product. 

High-pressure sales techniques:
 
Investment in a legitimate emerging company is long-term. A good little company is not going to skyrocket in a couple of weeks. Building a sound company takes years; you have a few days or weeks to decide whether the investment is right for you. 

Blind pools and blank checks:


Do not invest in any security without being told exactly how your money will be spent. Be sure you know which properties the company plans to buy with the offering proceeds and how much money is to be spent on management and promoters.