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FINRA cautions investors that low-priced stocks can carry high risk

On Behalf of | Jan 26, 2024 | FINRA Compliance

The Financial Industry Regulatory Authority is cautioning investors that while low-priced securities may carry the potential for profit, they also have some significant risks.

In its Investor Insights column, FINRA provided details about what to watch for when purchasing these securities, particularly the possibility of fraud.

The authority said they often fall into the categories of microcap stocks, issued by companies with
market capitalization of less than $250 to $300 million, and penny stocks, issued by small firms that trade at less than $5 per share.

According to FINRA, many of the low-priced stocks trade in the over-the-counter market and thus are not required to meet the listing standards of exchanges such as the New York Stock Exchange or Nasdaq. There is also a lack of publicly available information about certain smaller or emerging companies, making it more difficult to ascertain whether they are suitable to invest in.  In addition, some low-priced securities are not registered with the SEC, and as a result have fewer requirements for disclosing public information.

FINRA also warns investors to be on the lookout for fraudulent behavior when it comes to these stocks. “Unfortunately, low-priced securities also can be more susceptible to fraud,” the authority said.  “Scammers might take advantage of some of the lesser listing and disclosure standards to misrepresent key facts about the company. They might exaggerate—or even invent—its products or capabilities, perhaps capitalizing on current events or market trends to appeal to investors.”

When considering investments in low-priced securities, investors were advised to beware of certain red flags:

-Claims of guaranteed returns or that the investment is “no risk”;
-Overly optimistic performance projections for a new or untested company, especially in a sector with stiff competition, or unsupported claims regarding partnerships or joint ventures;
-Aggressive social media, email or press release campaigns, particularly of information that can’t be reliably confirmed;
-Unsolicited social media messages, emails, texts or phone calls promoting specific stocks;
-A lack of current publicly available financial information in SEC filings; and
-Frequent changes of company name, ticker symbol or business model, or abrupt expansion of an existing business model, often to benefit from the latest trend.

Scammers can also use social media or mass email campaigns to spread false information about a stock to lure in new investors, according to FINRA.  And when there is low trading volume, they can carry out manipulative schemes in which they artificially inflate the price of a security and quickly sell the shares.

Though low-priced securities can be legitimate investments, they are also regarded as speculative and tend to be volatile.  Investors are cautioned to only purchase them with “money you can afford to lose.”

Those considering these investments can check with the SEC or a state securities regulator to find out whether securities are registered, and can also use FINRA’s BrokerCheck to see if a person or firm soliciting an investment is registered and is the subject of any complaints.

The attorneys at Lewitas Hyman understand the complexities that come with being the subject of a regulatory inquiry by the SEC, FINRA, and other self-regulatory organizations, and we have the experience to guide and advise you through any type of regulatory investigation. If you are the subject of a regulatory proceeding, contact us at (888) 655-6002 or through our online contact form for a free consultation.