FSA Warning on sale of ‘Penny Shares’ Stocks
September 17, 2009Peter 1 Comment »The FSA has taken measures against 11 brokers who it claims have used pressure sales techniques to sell penny shares to older people. The companies have been barred from from sell low value stocks until they have changed the way they conduct business and proved that they no longer represent a risk to retail investors. Meanwhile, 6 of these firms have since already gone out of business.
Elderly investors have also been urged to watch out for brokers who use high pressure sales tactics to sell high-risk investments for commission. The Financial Services Authority stated that these companies were mostly taking advantage of over-50s (some of them even in their 70s and 80s!) and badgering them on the phone without warning them how risky penny share investing is. Some of these senior people and pensioners owned shares although in some cases these were shares acquired through privatisations so they weren’t really sophisticated investors.
In a few cases stock brokers were being paid commissions to sell particular shares which were then ‘aggressively marketed to consumers regardless of whether or not it was suitable for them’. In one specific case an individual finally agreed to buy the securities after a long conversation in which she stated more than ten times that she didn’t want to buy them.
Penny shares are usually traded in pence and don’t trade on the London Stock Exchange’s main market. They trade on AIM and the Plus Quoted Market while some don’t have a listing. The fact that they are often regarded as ‘cheap’ (as they trade in pennies making them less than £1) makes them appealing to inexperienced investors. However such shares are often considered high risk investments and are difficult to trade.
Lesley Titcomb, director of the FSA’s Small Firms and Contact division said further scrutiny of penny share dealers is in the workings.
She stated that its not acceptable to have people pressurised into buying equities especially when the risks of such investments haven’t clearly been explained. Further Lesley said that such firms will not be allowed to continue operating in the market and she warned that other companies should get their house in order if they wanted to keep operating.
The FSA also warned that it would be investigating sales of contracts for differences (CFDs) which allow retail investors to speculate on share prices without having to directly own the physical shares. The FSA considers CFDs as extremely complex instruments where investors may end up losing more than their original investments.
The Financial Services Authority has urged people to question brokers as to what commission they are getting for arranging the sale and why a share makes a good investment for them. Consumers who are thinking of buying penny shares are reminded of four simple measures to help protect themselves:
- Challenge the advice a broker gives you. Ask why a particular share is suitable for your particular circumstances;
- Research and verify that advice;
- Challenge the advice a broker gives you. Ask why a particular share is suitable for your particular circumstances;
- Ask what commission the broker will get for arranging the sale.
Incidentally, last week I received a half-hearted telephone call from an investment company trying to flog me some contracts for difference haha (basically spread betting by another name).
*runs screaming in the other direction*
Tags: CFDs, contracts for difference, FSA, penny shares, penny stocks
Posted on September 19th, 2009 at 2:05 am
Honest Brokers do not make cold calls.
So you should know as soon as they utter their first sentence that they are up to no good. Do not engage in conversation with them at all. Slam the phone down.
Afterwards ring 1471 to find out who called you. Without exception they will have witheld their number.
Registering with the telephone preference service does not stop them. BT say that if they are contacted about making unwelcome calls they just say they were using an old telephone directory.