Educate yourself

Make it a habit to research extensively about something before you jump into it. The access to information has never been this easy with the emergence of the internet. You can go online and learn a lot about penny stocks. You can also read investment newsletters and manuals like Standard's & Poor's and Moody's. These reference materials will give you updated information on penny stocks as well as different tips that you can use to invest wisely.

Try to absorb everything you can about penny stocks before you actually go out and invest in them.

Be well informed

One of the ways that you can combat penny stock fraud is to be well informed. You must know how popular penny stock frauds work so that you will detect them once you experience it.

Look out for warning signs

Penny stock scams usually give off warning signs so you need to keep an eye out for this. Some of the common warning signs are insistent sales techniques, mismarked trade confirmations and unauthorized transactions.

Small companies usually use insistent sales techniques when to lure people to invest in their penny stocks.

A trade confirmation is a document evidencing that a transaction has been made. This is usually furnished by the stockbroker to the investor. It states basic information such as how many shares were purchased, investor information and the bid/ask price at the time of the transaction. If you receive a trade confirmation that is mismarked or has many errors, you must talk to your broker immediately. It can be an honest mistake or a scam, so it is better to be careful.

Even if you have a stockbroker handling your transactions, it is always better to be on top of things. Keep track of all the transactions that you made so that you can pinpoint which are the unauthorized ones. Transactions which were effected without your consent can be a potential penny stocks scam. Your stockbroker might place stocks in your account, or store stocks in your account for their own benefit, without your knowledge.

Talk to your stockbroker immediately if this scenario happens to you. Again, it can be an honest mistake, but it can also be a source of fraud.

Exercise caution and due diligence

In penny stocks trading, you are dealing with money so you have to exercise caution all the time. Due diligence is also needed so that you will know which companies can be trusted and which are fraudulent. Take it upon yourself to get to know more about the company and do important background checks before you enter into any transactions.

You can also research about other information about the company like its financial history and industry standing so you can have a better grasp of what the company is like.