Penny stocks are the low priced and ill-liquid (thinly traded) stocks traded in the stock market. They are relatively cheap as compared to other blue chip stocks. So, it becomes a center of attraction of most of people and they find fascinating to buy these stocks. It is a general phenomenon of belief of majority of people that low price stock can easily tend to give better return in terms of percentage or even can multiply from its current value but the high priced blue chip stock can only give nominal returns.
The nature of penny stocks and myth of people that these stocks are best source of investment for definite high return end up becoming a major concern for them. These stocks are target for the stock promoters and manipulators. These manipulators initially buy these penny stocks in huge quantity from the market and then inflate their stock prices though false, misleading and speculative statements. Risk factors should be kept in mind before trading in penny stock.
They promote various false positive statements through various means like Bulk SMS, newsletters, websites, stock message boards, fake press releases, chat rooms and E-mail blasts to drive the interest of the stock into mind of small investors. As a result of this, the stock price starts to move up and looking to it, people tend to believe in the artificial hype and start buying the stock. Now the buying gets totally exaggerated and stock price tends to increase more and starting trading far above its fair value. The manipulators start dumping their investment bought at very lower or nominal price leaving people trapped at high prices.
It ends up making common people/investor trapped into poor and highly priced penny stock and eventually making a concern for people to invest into penny stocks. Pump and Dump schemes can be looked on for a better way of purchasing