It is known that investing in the penny stocks of a micro cap company can be very risky. This is why acquiring information about the company and its financial standing is imperative. Buying penny stocks without performing a scrupulous investigation on its background can be very costly.
Micro cap companies with questionable factors are becoming abundant. Before investing on their stocks, it is very important to probe their dubious issues.
Here are some questionable factors that you should pay attention to when investigating a micro cap company and its stocks.
The Company
Questionable suspensions. Check if the company has any suspensions coming from the SEC. A suspension may be happen if a company submits imprecise or unreliable facts and figures with the SEC, causing its trading activities to be suspended for up to ten days. It is logical to reconsider your decision to invest on a company that has any history of a trading suspension from the SEC.
Questionable sales strategies. A persuasive sales strategy happens when a company or a broker persistently pressures you to purchase their penny stocks. Usually, they will advise you that this is a once-in a-lifetime chance that is based on confidential inside information. Pressuring you to buy their penny stocks without giving you ample time to investigate so as to verify if there is partial truth on their claims is already a sign of a suspicious and hidden motive.
Questionable ratios on revenues and assets. There are times when micro cap companies allocate high funds to believed assets which, if carefully scrutinized, have nothing to do with their business in any way. A credible explanation should be made available once a company is found to have low revenues but large assets, and particulars which explain the reason for the low revenues should be presented.
Questionable items in the financial statement
The annotations of a company’s financial statements may point to unusual transactions. Examples of these transactions are uncommon loans or the act of exchanging questionable assets for company stocks. If doubtful items like these appear in the company’s financial statement, it is highly possible that this may be a sign of a penny stocks fraud.
Questionable auditing
Once the company’s auditors refuse to certify the company’s financial documents or declare that the company may not have enough funds to operate, this may denote a scam in the penny stocks sales. Another questionable auditing issue is when the company repeatedly changes its accountants.
Questionable amount of stocks owned by company insiders
If a company’s executives and promoters own huge amounts of stocks, a pump and dump scam is probable to happen. When executives and promoters own a large percentage of stocks, they can easily manipulate penny stocks prices, which is not good for the investors. Most of the time, these scams cannot be easily detected since they happen within the company, making it a closed door event.
The Promoters
Questionable cold calls
Cold calls are being used by promoters to endorse their penny stocks. They call potential clients and try to convince them to listen to their promising claims. Most of the time, cold calls from strangers should not be entertained. If you don’t know the person who is calling, don’t believe what they say.
Questionable brokers
A broker who refuses to provide printed information about a company whom he claims has promising penny stocks, are most probably involved in a fraud. Brokers who are always encouraging you to buy stocks without providing you with reasonable reasons to invest on them should be avoided.
These brokers are only after their fees; they don’t care if you loss or gain money. A professional and credible broker acts as someone who you can consult and get opinions fro; they give the needed information and statistics, and leave the final decision to the investor.