Beware the Penny Stock Hype

Don't be swayed by slick ads in national publications touting risky companies.

Maybe you've noticed a new trend in national business magazines and major newspapers: ads for penny stocks. Have these low-priced shares of usually dubious companies finally gone upscale? Well, their marketing has, but otherwise it's still the same hype designed to separate investors from their money.

Traditional penny stock campaigns follow a simple formula. Promoters and insiders use these advertising campaigns to increase the price of stock they own, then often sell shares at pumped-up prices. So even though these ad campaigns can cost hundreds of thousands of dollars and the companies they promote are weak or broke, those behind the hype still can make a killing.

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Contributing Editor, Kiplinger's Personal Finance