Penny stocks are the small capitalization stocks, are shares of publicly traded companies that typically trade at a very low price, usually for less than 50 per share. Stocks that are Considered as penny stocks that have Low Share Price, High Volatility, Lack of Information about company financials and High Trading Volume.
Trading in penny is somehow called as a Gambling because it is easy to control. The reason why it is easy to control is the share price is low so low capital need to make price action. For example a stock with Rs. 500 and the available volume is about 30CR shares and on the other hand a share with Rs. 5 and the available volume is about 40 CR shares and the max price action will be on the share with low price Because the high volume of shares to be purchase with low capital investment as comparison to the stock with high price. This term is called as Pump and Dump. This generally operates by the big operators with huge capital. They create a Rumor that affect the retail investor phycology and purchase with for the big profit and suffer from huge losses and the operator make a profit from it. Trading in penny stocks is often referred to as gambling due to its susceptibility to manipulation. The low share price of penny stocks makes it easier for individuals to control their movements. To illustrate, let’s consider a stock priced at $500 with a volume of around 30 million shares, and compare it to a penny stock priced at $5 with a volume of around 40 million shares. The penny stock, due to its low price, is more likely to experience significant price action. This phenomenon is known as Pump and Dump, typically orchestrated by large operators with substantial capital. These operators spread rumors that influence the psychology of retail investors, enticing them to purchase these stocks for potential big profits. Unfortunately, many retail investors end up suffering significant losses, while the operators reap profits from this scheme. To further elaborate, it is important to understand the concept of market manipulation and its impact on investors. Taking into account the aforementioned scenario, it is evident that penny stocks, due to their low price and higher volume, are susceptible to what is commonly known as Pump and Dump schemes. These schemes are typically orchestrated by well-funded operators who disseminate false information or rumors, thereby manipulating the psychology of retail investors. The intention is to entice these investors into purchasing the stocks in hopes of significant gains. However, the unfortunate outcome is that many retail investors ultimately suffer substantial losses, while the manipulators profit from their deceitful actions.
Many cases occur in many parts of the world that are :
The Harshad Mehta scam. The Harshad Mehta scam was a significant financial fraud that occurred in India during the 1990s. Harshad Mehta, a stockbroker, manipulated the stock market using illegal means, leading to a massive rise in stock prices. This fraudulent activity enabled Mehta to make substantial profits while causing widespread market instability. The scam eventually came to light, resulting in a severe setback for the Indian economy and leading to legal and regulatory reforms in the country’s financial sector. The Harshad Mehta scam serves as a reminder of the importance of maintaining integrity and enforcing strict regulations to safeguard the integrity of financial markets. The Ketan Parekh scam The Ketan Parekh scam was a significant financial fraud that unfolded in India during the early 2000s. It exposed loopholes in the country’s financial system and raised concerns about regulatory oversight. The mastermind behind this fraudulent scheme, Ketan Parekh, manipulated stock prices and engaged in circular trading to inflate the value of certain stocks artificially. The scam eventually led to a market crash, causing substantial losses for investors and triggering a crisis in the Indian stock market. As a result, it prompted regulatory authorities to implement stricter regulations and improve surveillance mechanisms to prevent such scams from reoccurring.