Penny stocks can be riskier than any other stock. Here's why they're so dangerous.

Outside of the mainstream banal exchanges, determination is simply a lesser known marketplace with divergent regulations and low-priced "penny" stocks — which contempt the sanction — commercialized astatine $5 and beneath and whitethorn lure successful unsuspecting investors looking for wealthiness connected Wall Street.

Through the years, authorities person busted monolithic penny-stock scams that person defrauded thousands of investors retired of millions of dollars, but fraudsters are inactive retired there.

"I'm getting a batch of calls from investors who are duped and getting scammed by-penny banal operators," Jacob Zamansky, lawyer with his steadfast Zamansky LLC, told CNBC.

These alleged over-the-counter equities markets person experienced dependable increases successful trading activity, spiking successful 2021, according to information from the Financial Industry Regulatory Authority.

Penny stocks

Although determination is thing inherently incorrect with low-priced stocks, they are considered speculative, high-risk investments due to the fact that they acquisition higher volatility and little liquidity. For example, if you bargain a penny banal and past determine you privation to merchantability it, it could beryllium much hard for you to find a buyer.

"At the extremity of the day, you're buying thing successful the banal market, idiosyncratic other is selling it. So, you person to deliberation astir who mightiness beryllium the different idiosyncratic connected the different broadside of the trade," Andres Vinelli, main economist astatine the CFA Institute, told CNBC.

OTC markets necessitate different, varying fiscal reporting. This lack of transparency makes it easier for fraudsters to manipulate accusation and misrepresent financials. If paired with unscrupulous stock promoters making exaggerated claims, investors tin go victims.

"It each benignant of comes unneurotic arsenic the cleanable tempest of accidental for transgression enterprises," Greg Ruppert, caput of FINRA's subordinate supervision organization, told CNBC. "Certain statements oregon claims could beryllium made that are not readily verifiable oregon easy investigated oregon tracked."

The Wolf Of Wall Street

Jordan Belfort orchestrated 1 of the astir notorious penny-stock scams successful past done his brokerage firm, Stratton Oakmont, which was portrayed successful the 2013 movie "The Wolf Of Wall Street," starring Leonardo DiCaprio.

"He truly was a quality arsenic Leonardo DiCaprio portrays him successful the movie," Zamansky told CNBC. "He had an expression. He sold steaks to restaurants to commencement with. And helium said, If I tin merchantability steaks, I tin merchantability stocks." 

Before Zamansky started representing investors who were abused by Wall Street firms, helium was an lawyer for Stratton Oakmont. That's wherever helium learned astir the concern of penny stocks.

"I person to accidental I learned each the soiled tricks of Wall Street from representing those folks, and I utilized my cognition to assistance investors, starting successful 1998," Zamansky told CNBC.

Innocent investors bought into Belfort's income pitch, which artificially pumped up banal valuations. Then, the steadfast would merchantability its shares. That's known arsenic a "pump and dump" scheme.

"What I didn't know, which the SEC aboriginal recovered out, is that [Stratton Oakmont] had their ain positions successful these stocks. They would merchantability out," Zamansky said, referencing the Securities and Exchange Commission. "And, the customers would beryllium near holding the bag."

Eventually, the scam collapsed, and Belfort was convicted of fraud and served clip successful prison.

Belfort did not respond to CNBC's petition for an interrogation but successful CNBC's "Bitcoin: Boom oregon Bust" 2018 documentary, helium spoke astir his clip arsenic a scammer and however he's turned astir his act.

"I was a scammer. I was. [I'm] the archetypal to admit it," Belfort told CNBC successful 2018. "I would accidental astir of my steadfast was legitimate, but determination was a information of my steadfast that wasn't."

But, this is conscionable 1 illustration of penny-stock fraud.

Watch the video supra to larn much astir however ultra low-priced stocks inspired a caller breed of investors, high-stakes gamblers, risk-taking fraudsters and enforcement crackdowns.