How to Spot Potential Marijuana Stock Scams

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April 21 (Bloomberg) -- Finra's Gerri Walsh discusses possible marijuana stock scams with Trish Regan on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Think about some of these stocks.

Let me show you some charts.

This one is up nearly 420% in the last six months.

I think we can show you cannabis science.

Medical marijuana inc.

Has gained more than 60%. none of these companies seem to be doing anything at or making money, the clearly investors are enthusiastic.

What is going on?

There has been a lot of focus on medical marijuana and marijuana being available for recreational use.

As a result, this is a new sector.

People are thinking if i can just get in, i can make my millions.

We are seeing a lot of investor interest.

What do investors need to know?

The most important thing is any time there is a new sector opening up, be cautious.

Look at where the stock trades, especially if it does not trade on a national exchange.

That means there's not a lot of information about the company.

You want to check out thoroughly the company and individual touting it.

You especially want to pay attention to the financials filed with the sec and how they stack up with the touts your hearing on the internet.

A penny stock, should that be a red flag?

The fact this is not trading in numbers that are dollars?

Is that something investors should be careful of?

That is a warning sign.

Penny stocks are risky.

They tend to be thinly regulated and traded.

Often they are not companies that file reports with the securities and exchange commission.

When you file reports, you're getting audited financial statements.

That gives you one more layer of protection.

Can you misrepresent stocks?

Can they say they are doing something when they are not?

What is interesting is the difference between what you see in the filings even for some of the penny stocks that have been seeing sharp increases and falls.

They say they are development stage company.

They say they don't have products, services, or distribution channels.

They say they are just starting.

But the touts about some companies would lead you to believe otherwise.

That is why we tell investors you have to do your homework.

Not only about the company but also the individual telling you that you should invest.

Is it an internet campaign around the companies, the excitement people feel because they want to be invested in the marijuana business?

Marijuana in the title or they have shifted from one business model to another.

That is something we see a lot in these kinds of potential market manipulations or scams.

If a company was involved in gambling in nevada and then turned to precious metal mining, and then was in nutraceuticals, and now is in marijuana.

Four different business lines, five years.

That kind of thing is a red flag.

That would raise an eyebrow.

Thank you.

We appreciate you being here.

Kfc is bringing back a fan

This text has been automatically generated. It may not be 100% accurate.

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