If you thought investing in the stock market wasn't filled with enough dangers, then add one more fright: zombie stocks. They are real, and they are out there -- ready to eat your portfolio, if not your brains.
OK, just what is a zombie stock? It is stock from a company that has stopped complying with SEC reporting rules and has been delisted from the major stock exchanges. In some cases, there are zombie stocks still being traded over the counter from companies that have been out of business for years. Take the case of the aptly named Fantom Technologies, which shut its doors in 2002. The SEC finally got around to suspending trading in Fantom's shares just last month.
There are also zombie stocks lurking about from companies that haven't been delisted because of filing failures, but because they have gone into conservatorship and now trade over the counter at pitifully low prices -- Fannie Mae (OTC BB: FNMA.OB) at $0.327 and Freddie Mac (OTC BB: FMCC.OB) at $0.348, for example.
At the risk of turning this space into a Disney theme park, I have to mention a threat out there related to zombie stocks: pirates. That is a term used by OTC Markets, an online marketplace for non-exchange traded stocks. A skull and crossbones is placed next to an OTC stock listing (zombie or fully alive) to warn if that stock is being aggressively hyped. Penny-range zombie stocks are common targets of such hyping. Be aware!
Some businesses have harnessed zombie stocks to do their bidding. I'm talking about companies that use reverse mergers. That's when a once-listed but now dormant company "magically" takes over another company, one that wishes to avoid the close look that the SEC would normally give an IPO. China Green Agriculture
It seems that this bit of stock exchange alchemy is quite common among small-cap Chinese firms that manage to get listed on the major American exchanges. A recent count revealed more than 90 such companies.
How to protect yourself
If something seems too good to be true, it usually is. Don't fall prey to penny-stock hype. And do thorough research like you would with any investment, but take an especially close look at those small-cap reverse merger companies. It seems that many -- especially those from the Chinese mainland -- are coming under much closer scrutiny for their "backdoor IPOs" using zombie companies as their hosts. There's often a reason they don't want to ring the front doorbell.
Fool contributor Dan Radovsky has no position in the above mentioned companies. The Motley Fool owns shares of Yongye International and China Green Agriculture. Motley Fool newsletter services have recommended buying shares of Yongye International and China Green Agriculture. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.