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Penny share warning for investors

Penny share warning for investors

Category: Investments

Updated: 16/09/2009
First Published: 16/09/2009

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Investors have been warned not to be pressured into buying so-called penny shares, investments with a low market price which are not traded on the main stock exchange.

The Financial Services Authority (FSA) has revealed it is taking action against penny share dealers after finding that older people are being targeted with high pressure sales tactics.

So far this year, the regulator has ordered eleven firms out of the penny share market until they overhaul their business model and prove they no longer pose a risk to consumers, while six of those firms have now ceased trading completely.

Research conducted by the FSA found that certain stockbrokers had been targeting people who already own shares, usually over the age of 50 years, and some of whom may have acquired a few shares through privatisations.

In some cases the brokers were paid commission to sell a particular share which was then aggressively marketed to consumers regardless of whether or not it was suitable for them.

"It is totally unacceptable to have consumers pressurised into buying shares," commented Lesley Titcomb, director of the small firms and contact division at the FSA. "It is all the more disturbing when the risks of those shares have not been set out clearly."

The regulator said that for those people who were thinking of buying penny shares, there are four measures they can take to help protect themselves:

1.Challenge the advice a broker gives you. Ask why a particular share is suitable for your particular circumstances
2.Research and verify that advice
3.Make sure you know the risks attached to the shares
4.Ask what commission the broker will get for arranging the sale.

The sales practices of Contracts for Difference (CFDs), investments which allow people to speculate on the movement of share prices but could see investors lose more than their original stake, are also being looked at by the FSA.

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