How to Avoid Getting Burned by "hot stocks"

How to Avoid Getting Burned by "hot stocks"

The best way to protect against investment fraud is to ask tough questions about the opportunity and the people promoting it—before you invest. For example, you’ll want to know:

• Are the Broker and the Firm Licensed? Contact your securities regulator to find out. The International Organization of Securities Commissioners (IOSCO) provides contact information for most securities regulators on its website. Be sure to ask whether the broker or the firm has a history of complaints. If the person claims to work with a U.S. brokerage firm, call the NASD's public disclosure hotline at (800) 289-9999, or visit its website.
• Is the Investment Registered with SEC? Check the SEC's EDGAR database to find out. But always remember the fact that a company has registered its securities or has filed reports with the SEC doesn't guarantee that the company will be a good investment. Likewise, the fact that a company hasn't registered and doesn't file reports with us doesn't mean the company is a fraud.
• Where Does the Stock Trade? Many frauds involve microcap companies whose stocks are quoted in the "pink sheets" or on the OTC Bulletin Board. These companies generally do not meet the minimum listing requirements for trading on a national exchange, such as the New York Stock Exchange or the Nasdaq Stock Market. And companies quoted in the pink sheets generally do not file reports or audited financial statements with the SEC. It can be very difficult for investors to find reliable, unbiased information about microcap companies. For that reason, microcap stocks can be among the most risky investments.
• What Is the Stock Price in the U.S.?
Before you purchase any U.S. stock, be sure to independently confirm its current U.S. trading price. Dishonest brokers may charge you a much higher price, assuming that you’ll never check. The Nasdaq’s website—at quotes.nasdaq.com—features current quotes for stocks listed on the New York Stock Exchange, American Stock Exchange, and the Nasdaq Stock Market and for stocks quoted on the OTC Bulletin Board.
• How Can I Independently Research This Opportunity?
Always ask to see—and carefully read—written information about the company, including a prospectus and recent financial statements. But also research the company on your own. For tips on how to do this, please read our online publication entitled Get Info About Companies.

These additional tips can help you avoid unscrupulous brokers:

• Look Past the Name
—Some fraudsters illicitly use the names of legitimate brokers and brokerage firms. Be sure to compare any address a broker gives you with the address you obtain from your securities regulator or the NASD. If they are not the same, you may be dealing with a fraudster.
• Independently Verify References
—Never rely solely on the references given to you by a broker you’ve never worked with before. The "satisfied clients" or "international organizations" they suggest you contact may well be part of the scam.
• Be Wary of Unusual Banking Instructions
—Most reputable brokerage firms in the U.S. use U.S. banks and would not, for example, ask you to transfer money to a U.S. bank for further credit to a non-U.S. bank.

For more tips, please read our online brochures entitled Ask Questions and Microcap Stock: A Guide for Investors.