Penny Stocks and Magic Bullets: How to Avoid Common Finance Scams
Ever since Google figured out I like personal finance I’ve been bombarded with YouTube ads for promoters who will send you a list of “magic, money-making stocks” every week. If you’re a business owner you’ll know the ones I’m talking about.
I used to be baffled as to how these companies manage to convince people they knew some magic stock secret. Putting the ethics and legality of these obvious penny stock pump-and-dump schemes aside, you’d think it would be common knowledge that anyone claiming to have insider knowledge on specific stocks would be instantly recognized as a scammer.
But they rarely are. Do you know why?
Two reasons:
- Finance and the basics of the stock market are not taught in the US. You have to be lucky or interested enough to study it yourself in order to recognize these ads for what they are.
- People WANT for there to be some magic stock that will make them a millionaire overnight. These ads will always say they can point you to the next Microsoft or Google, and who wouldn’t want to be swimming in cash with no effort in the next few years.
I was lucky enough to have a father who taught me about the stock market when I was 10. He gave me a fake portfolio and $100 fake dollars to invest and told me to go wild and see if I can make money.
You’d better believe my 10 year old self went STRAIGHT for the penny stocks.
If you have no knowledge of the stock market and are operating off common sense alone, like 10 year old me, then of course you’d think it would be great to invest into as many penny stocks as you can until you find one that doubles your money and call it a day.
Aka, you’d automatically be looking for that “magic stock.”
And if you have a system where you can tell a few thousand people to go buy shares in that same stock… suddenly you’re both creating magic stocks for yourself AND hoping the feds don’t catch on.
Those stock gurus on YouTube buy the penny stock of their choice before they tell their followers to buy it as well (the pump), and then they sell it a few days later once everyone has reacted to their “magically inflating stock” (the dump).
The only person who benefits is the one running the scheme, so long as they don’t get caught.
To anyone reading this and thinking, “well what the heck do I do instead?” read The Stock Series here: https://jlcollinsnh.com/stock-series/
It’s still the most comprehensive explanation of basic wealth building and financial freedom principles that I’ve found to date.
I’m not going to end this with a cheesy, “there are no shortcuts in life.” Some people do indeed take shortcuts and get lucky. The problem is that those shortcuts always come with some pretty dramatic risks.
I’m not exactly risk-averse (I did pack everything I own into a suitcase to travel the world, after all), but when it comes to building wealth, I’d much rather work smarter rather than harder. That means being the house (index funds) rather than the individual gambler (single stocks) when investing.
And in gambling, the house always wins.
