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Avoiding Scams in Marijuana Investing

Marijuana Stock Scams Abound

Written by Brian Hicks
Posted September 3, 2013

If someone approaches you with information about a smoking marijuana stock, you should be hesitant to believe it. Scammers have been working hard trying to nab unsuspecting investors ever since states started to legalize the drug for medicinal purposes.

Always remember the old adage: if something sounds too good to be true, it probably is.

marijuana moneyTwenty states have already legalized marijuana for medicinal use. Washington and Colorado are so far the only two to declare recreational use legal, but more could soon follow suit.

With more states allowing its use, the demand for marijuana is growing. When there’s a demand for something, investors run to it, knowing stock prices will likely rise.

The only problem is that scammers are waiting for unsuspecting and eager investors. Recently, they've been telling investors about stocks that aren’t necessarily benefiting from the growing marijuana industry, selling worthless stocks using a system called “pump and dump.”

The Financial Industry Regulatory Authority (FINRA) reports that scammers will talk up a thinly traded stock to investors, saying that it will soon peak, which is completely misleading.

From the Financial Industry Regulatory Authority:

Con artists behind marijuana stock scams may try to entice investors with optimistic and potentially false and misleading information that in turn creates unwarranted demand for shares of small, thinly traded companies that have little or no history of financial success.

Once investors gets excited, the scammer sells the shares for a high price and disappears. The buyer ends up with a stock in his hands that doesn’t peak and an empty wallet.

Most of the stocks scammers are using are penny stocks. These stocks usually trade for less than $5, and many trade for less than a dollar. These cheaply traded stocks are low liquidity investments. They can be found on the over-the-counter bulletin board (OTCBB), pink sheets, or securities exchange. This makes them easy to invest in, even though they can be quite risky.

The risk comes from its volatility. Low-priced stocks can go up pretty quickly and by a lot, but they can also plummet quickly to almost zero. It’s not comforting, but for lucky investors who know what they are doing, penny stocks can end up bringing in a lot of money.

That’s what the scammers rely on when trying to talk people into buying. They know the right words to say to make even some of the most seasoned investors want to jump on the potential profitable stock the scammer dangles in front of them.

What to Watch for in Medical Marijuana Stock Scams

Don’t talk to strangers. Your parents taught you this as a youngster, and it still holds true today. Don’t let a stranger come to you with hype about a marijuana stock unless it's from a trusted source. Most of the scams happening today originate from an email, fax, or text message.

Be wary of OTCBB and Pink Sheets. Like mentioned before, penny stocks are risky because they are volatile. However, they are also risky because they don’t have to meet any of the FINRA’s standards regarding the amounts and number of shareholders. That means the stocks can hit bottom and have no shareholders.

Are All Marijuana Stocks Scams?

No, not all marijuana stocks are scams. The industry is really growing, and there are companies that are benefiting from it.

Some of these are:

  • Medical Marijuana Inc. (OTC: MJNA)

  • Cannabis Science (OTC: CBIS)

  • Growlife (OTC: PHOT)

So don’t turn away from marijuana stocks altogether. There is a money to be made in them. You just have to be cautious and do your research.

 

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