Penny stocks are traditionally defined as equity securities that trade below a market value of $5 per share. The companies that issue shares deemed to be penny stocks are small or micro-cap companies that generally have not gained positive momentum among investors. Penny stocks are speculative securities and are suitable for only aggressive investors that are willing and able to accept extreme market volatility and total loss of their investment. In addition, investors should be prepared to experience illiquidity, meaning they may not be able sell the penny stock on the open market due to a lack of demand.
Penny stocks have historically been the subject of “pump and dump” schemes whereby the financial professional recommends that a customer purchase a large quantity of a penny stock because he or she has a personal stake in the company. Because penny stocks are thinly traded securities, large purchases or sales can cause the stock price to rise or fall. With a customer’s large purchase, the penny stock prices rises, providing the financial professional an opportunity to sell his or her personal shares at a profit which, in turn, may cause the penny stock price to decline. This type of scheme generally leaves the investor “holding the bag” with all of the losses.
The Wolper Law Firm has extensive experience handling claims involving penny stocks. If your financial advisor or stockbroker recommended that you invest in penny stocks, and you experienced losses, please contact the Wolper Law Firm for a free consultation to discuss your rights and options.