South African investors are cautioned to be very careful if you are considering investing in a company based on an unsolicited stock promotion. The promotion may be from a paid promoter or company insider who stands to profit at your expense from selling shares after creating a buying frenzy and pumping up the stock price as part of a pump and dump.
Microcap Stocks/ shares / Penny Stocks/ Easy manipulated
There is always less public information available to the public on the market on microcap stock or shares, these are law priced shares issued by very small companies, (Sometimes known as Penny stocks) even though the issue of the shares itself is registered and in accordance with the securities laws, fraudsters and criminals find it easier for them to spread false information on the market, they are also able to manipulate the price of these low priced shares as these microcap shares or stock usually are less liquid as compared to shares of large companies that are listed on a trading market.(The stock Exchange).
The result is that insiders sell of their shares, dump them into the market and the new buyers are left with useless, less liquid shares or stock. This also is another form of Investment fraud.
(The graph below shows simple example of a microcap stock program)
Investors should be vigilant and cautious and look for the following warning signs of microcap fraud:
Unsolicited stock recommendation or heavy stock promotion
Where you notice that that the companies’ shares are being heavily promoted more that its underlying product or service, as an investor you need to be concerned.
No real business operations
In most cases microcap shares that are heavily and aggressively promoted belong to companies that are dormant and have no operation at all.
Unexplained increase in stock price or trading volume
In most cases there are share price increases that do not have proper explanation, and some of these Microcap shares are traded on the OTC (market, the Over the Counter Market)
Frequent changes in company name or type of business
The typical Microcap shares fraud can also be identified by a frequent change in company name or business plan may suggest no real business operations.