So-called microcap companies have limited assets, and their stocks trade at $3 to $5 a share. They usually aren't traded on the major exchanges, and because of lower reporting requirements to regulators, the trading of these stocks can easily be driven by fraudulent schemes.
Even without fraud, microcap companies are unproven. But if a company manages to create the next pet rock, the payoff to investors can be significant.
The Securities and Exchange Administration offers guidelines for investors to avoid fraud:
- Don't buy from a high-pressure salesman.
- Make sure the company has a legitimate audit.
- Be suspicious of companies in which insiders hold a large proportion of the stock.
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