Clark Howard

Penny Stocks Are More of a Problem Than Ever, Clark Warns

The Wolf of Wall Street, a blockbuster movie released in 2013, features perhaps the most famous penny stock plotline in cinema history.

Directed by Martin Scorsese and featuring A-list stars, the movie depicts the true story of how Jordan Belfort (played by Leonardo DiCaprio) got filthy rich after founding Stratton Oakmont in 1989.

Belfort served 22 months in prison for securities fraud and money laundering. He would’ve served a much longer sentence but became an FBI informant and helped incriminate numerous partners and associates.

At the base of the scandal? Penny stocks. Belfort ran what’s called a “boiler room” where he and his team used high-pressure sales tactics to run pump-and-dump schemes with penny stocks for at least a portion of Stratton Oakmont’s history.

Penny Stocks Are a Huge Problem in 2024, Clark Warns

The past has come full circle, albeit wearing a different camouflage.

“It used to be a big problem in the analog era. Boiler rooms if you’re not familiar with the term is where a crook would set up a business that appeared to be reputable and they’d set up an outcall call center where you’d have people who were on commission and they would be making calls all day long trying to con people out of their money,” money expert Clark Howard says.

“Well, one that was so popular back in the 1980s and into the ’90s was boiler rooms that sold what were called penny stocks. That continued to this day but now in a digital era. And so many people have been separated from their money because of these so-called penny stocks.”

Clark Frets About Penny Stocks and Scams

Before you conclude that penny stock pump-and-dump scams run out of sleazy call centers are a relic of the past, heed Clark’s warning. But your assumption is at least partially true. In the digital age, there’s less overhead and call centers aren’t always necessary.

“You know, I am very much of a positive mentality. I’m almost Pollyanna. But there’s something that is driving me crazy about the stock market that I need to talk about today. It’s an important lesson, particularly for people who are newer to investing,” Clark says.

“Today, with the internet and social media, penny stocks are more of a problem than they were 40 years ago because it doesn’t take the level of labor involved or the costs.”

Pump-and-Dump Schemes and Penny Stocks

Often, pump schemes begin with an insolvent, irrelevant company that’s publicly traded. Maybe at one time, it was a vibrant enterprise. The scammers will buy the company for next to nothing “because it’s barely alive,” Clark says.

Then, in today’s age, the pump happens online via social media, often supported by fabricated websites and other digital materials.

“Now remember, they bought these shares for like nothing. And they will tout it and say, ‘Oh, there’s a breakthrough coming on this, that or the other. They have a new way to make a car go 2,000 miles between a charge and it’s going to revolutionize the world,’ or whatever it is. Or they have a breakthrough about how to treat a particular disease or a cancer or whatever. And it’s all a bunch of hooey they just make up and post on social media,” Clark says.

“They’ll set up impressive-looking websites and all that. Again, for a fraction of the cost. Some of this ends up bending into the whole meme stock thing that came alive during COVID. And a lot of these listings even have an aura of respectability.”

Clark referenced reading a news article about how many modern pump-and-dump schemes involve Nasdaq-listed companies. It’s one of the most respected stock exchanges. But a lot of worthless companies linger there. Because delisting a Nasdaq stock involves “a slow-walk procedure that takes as long as two years,” Clark says.

That makes those companies prime targets for price manipulation.

“The shares will move up in social media within weeks. They’ll move up a whole lot. And then the people who are the promoters sell out, cash out, make millions upon millions of dollars,” Clark says.

“And the people who fish hook in mouth bought into the hype, their shares pretty much almost immediately become worthless.”

How To Spot and Avoid Pump-and-Dump Schemes

The crux of pump-and-dump avoidance is recognizing when you're emotionally drawn to a corner-cutting, get-rich-quick strategy. Clark wants you to invest in a slow, methodical, long-term, "boring" way using dollar-cost averaging and low-cost funds such as target date funds inside of tax-advantaged retirement accounts.

“Know that when somebody’s touting something as a breakthrough … ‘It’s going to be the new Apple. It’s going to be the new Google.’ And right now, what are the touts going to be about? AI! ‘They’ve got this new way of doing AI that’s going to just take over the world. Blah, blah, blah!’

“Just know that when you get into their game and their hype, you’re going to lose. It’s what happens anytime we want a way to speed up financial independence. That’s what makes us vulnerable to something like the pump-and-dump. Where people rip you off in a penny stock. I want your money to be with you [and] grow with you. I don’t want you to be taken advantage of.”

Final Thoughts

Penny stocks and pump-and-dump schemes aren’t just wild times from the 1980s and ’90s. They just take on different forms on social media, often blending with meme stocks, crypto and other get-rich-quick ideas.

Shrouded in legitimacy, it can be easy to fall for these market manipulations. Especially if you’re investing emotionally and hoping to speed up the time it takes to build wealth.

Clark’s advice is to play a longer, safer strategy when it comes to saving for retirement.

The post Penny Stocks Are More of a Problem Than Ever, Clark Warns appeared first on Clark Howard.

0