Penny stocks are priced pennies to the dollar for good reasons. A penny stock company has relatively small capitalization – thus, the name microcap stocks – of just a few million dollars in comparison with the multi-million and multi-billion capital of the global corporations.

There are legitimate penny stock companies with great potential for growth in the near future with an infusion of funds from the initial public offering (IPO). Unfortunately, there are also plenty of companies that can only be considered shadow or shell organizations with very little, if any, chance to deliver on their promises to prospective shareholders. The latter are what the stock market insiders call ‘sharks’ because of the methods they employ on unsuspecting traders and investors.

Truth Behind the Fiction

The main attraction with penny stocks is the promises made by either the issuing company or the stock brokerage or both that said company will be experiencing a boom in its operations. Of course, along with the boom comes the increase in the value of the stocks from pennies to dollars, which means profit for the investor who purchased the stocks at the right time.

Most of the time, however, the truth is too far behind the fiction where penny stocks are concerned. Many of the issuing companies are dumping their shares on the investors since the organization is already going downhill. Instead of absorbing the loss for their own mismanagement, these company executives will let the investors take the axe once the penny shares devaluate in the future.

It may also be that the penny stock brokerage executives want to earn higher commission fees for the year. To do so, they will persuade a legitimate company to go IPO and then leave them in the dust once the sale has pushed through and the commissions are in the bank account.

Well, of course, there are also legitimate reasons for a penny stock company to go public. It may be that additional plans are required for expansions. It may be that the company has reached its apex of operations and plans to change its tax structure. But for many microcap shares offerings, investors are well advised to be very vigilant about the intentions behind the activity.

Dangling the Carrot

Now, many will wonder how shadowy penny stocks still manage to lure so many investors and traders into its fold despite the dangers. Well, these companies and brokers are not called sharks for nothing with their many ways to lure others into the trap including but not limited to the following baits, so to speak:

* Low price per share
* Promises of high potential for profits
* Promises of the company going big-time despite the recession
* Promises of incentives in ownership

These baits are given to the investors and traders via sales techniques that have been proven effective. E-mail and slow mail spamming, cold calling and targeted selling are just a few methods by which these companies and brokers will get their message across.

Now, it is up to the investor or trader to be taken in by the promises to actually pour money into the IPO without doing careful research, evaluation and analysis into the matter. If you are one of these investors, then you may have just become a victim of the sharks.