How to Avoid Marijuana Penny Stock Scams and Select Legit Stocks

marijuana penny stock scam
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Marijuana Penny Stock Scams

With the proliferation of legal marijuana companies and the massive growth we’ve seen in the industry, it’s no surprise that less-than-savory characters have tried to make a dollar off the boom through, shall we say, less honest means.

Marijuana penny stock scams aren’t at an epidemic level, but they are trouble enough that pot investors ought to be aware of the telltale signs.

First, let’s get the most important question out of the way: Is investing in marijuana penny stocks safe? The answer is a resounding yes.

The vast majority of marijuana penny stocks are companies that are not only legitimate, but also offer strong potential for high returns.

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Consider that, when I first began covering marijuana stocks and recommending Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB), the company was valued at under a dollar. That marijuana penny stock has since shot up by almost 300%.

That just goes to show that marijuana penny stocks are some of the most promising companies in the industry, due to their ability to see rapid growth in short periods of time.

So, choosing the best marijuana penny stocks yields strong returns, but what if you’re not so lucky?

Marijuana penny stock scams can take a variety of forms, from pump-and-dump marijuana stocks to companies that are selling more snake oil than cannabis oil.

These companies are the type you often see crop up in emergent industries.

With so much money being made in the industry and excitement riding high, bad companies use the hype in order to draw attention and fast injections of capital, sending these penny stocks soaring in short order.

The problem is that, after a short time, the majority owners dump those stocks, taking their quick gains and often sinking the company in the process. The company itself never truly offered anything of value, but was instead a type of get-rich-quick scheme.

These unscrupulous individuals leave unsuspecting investors in the lurch, with money in an empty company that has just seen its stock value tank.

That is often the most common type of marijuana penny stock scam. Penny stocks are notorious for their volatility in all industries.

In the already unpredictable marijuana sector, identifying the good from the bad can be a tricky task.

Penny stocks are valued so low precisely because they have little in the way of concrete assets and figures propping up their value.

This gives them immense room to grow (because what would be considered a minor move in larger companies proves seismic on a penny-stock scale), but it also makes them harder to fully valuate.

How to Identify a Pot Stock Scam

So, what are some of the key identifiers of marijuana penny stock scams?

One of the safest ways to avoid a scam is to make sure that whatever company you invest in is registered with a legitimate and trusted exchange.

When it comes to marijuana companies, unfortunately, there is only one pure-play marijuana company listed on a major international exchange: Cronos Group Inc. (NASDAQ:CRON).

Many other marijuana penny stocks are traded over the counter (OTC). But—and this is an important “but”—most legitimate marijuana penny stocks will be traded OTC and on Canadian exchanges.

While Canadian exchanges vary in terms of how much vetting and regulating they do of the companies featured, the Toronto Stock Exchange (TSE) and the Canadian Venture Exchange (CVE) are two of the more common listings you’ll find prominent marijuana penny stocks on, and they are generally trustworthy.

That is to say, if you find a marijuana penny stock that catches your fancy and it is listed both on OTC markets and a Canadian exchange, that dramatically lowers the risk of it being a scam.

Scams are often—not always—perpetrated by companies that are only listed on OTC markets. That’s because there is very little in the way of oversight to be traded in such a manner.

Anyone looking to run a penny stock scam would find it easiest to do so on the OTC markets and avoid listing with a legitimate exchange.

Now, that doesn’t mean every company that doesn’t have a listing on a stock exchange is a dud, but it does increase the risk.

Another good rule of thumb for avoiding scams is one you first learned in grade school: if it’s too good to be true, it probably is.

Many marijuana penny stock scams will offer sweetheart deals and other incentives to get you to sign on. For instance, they may offer free shares or other benefits in order to garner investments.

This is generally not good practice, and a legitimate company shouldn’t need to offer more than the potential for returns in order to gain your trust.

A final bulwark you have at your disposal—and this is good practice no matter what type of investment you’re making—is to search up the management.

Often, you’ll find that shady businesses have shady executives with a trail of bad behavior.

If you ever find yourself looking at a company with leadership that has a history of mistreating investors, run.

How to Select Best Pot Penny Stocks

The best pot penny stocks are for companies that can clearly demonstrate their value proposition.

What that means is that, instead of speaking in vacuous terms and empty promises, they demonstrate exactly what their company is going to do to make it successful.

It’s a simple rule, but it’s one that often gets overlooked as investors are dazzled by flash without ever seeing substance.

Dig into the numbers, do your research, look at the company’s executives, and otherwise find companies that are new but have a lot to offer in terms of new ideas, innovation, or simply strong business sense.

Those are exactly the type of marijuana penny stocks you want to put your money in.

Analyst Take

Marijuana penny stock scams aren’t around every corner, but they can wreck your portfolio in a hurry if you’re not careful.

It’s not particularly hard to avoid them, but it does take effort, time, and the ability to remain clear-headed as gaudy financial figures and loaded terms are lobbed your way.

Marijuana penny stocks have the ability to be one of the best performers in your portfolio, so don’t be afraid of them. Just know the signs of scams and you should be just fine.