Beware of Penny Stock Pump and Dump Scams

Penny stocks can be exciting, nerve wracking and sometimes even profitable if you know what to watch out for. When investing in a penny stock company, you have to do a lot of research on the company. There are many great newsletters that can point you to a good penny stock, but there are also too many bogus penny stock announcements and emails. These pump and dump schemes make certain penny stocks look like can’t lose 10,000% winners. Learn what to be aware of when investing in penny stocks.

Penny stocks can be interesting and risky, but when you have pump and dump scams sending you false information, penny stocks can be dangerous. If you trade or invest in penny stocks, you need to be aware of the pump and dump scams.

Penny Stocks

Some consider a penny stock as a stock that is priced at $1 or less. Others define a penny stock as a stock that is priced at $5 or less. You usually find penny stocks on the over-the-counter bulletin boards (OTCBB) or on the pink sheets. Some of these penny stocks have very low or no volume, which can make penny stocks hard to sell once you have bought them.

Microcap Stocks

Microcap stocks are companies smaller than penny stocks with a market capitalization of between $50 million and $300 million. Microcap companies do not have to file a financial report with the SEC (Securities and Exchange Commission), though many do. The lack of a report on file can make it harder to research a company and make it easier for pump and dump scams [1].

How Pump and Dump Scams Work

Pump and dump scams are usually not something an actual company will do, but can happen with phony companies. One or more unethical investors will buy thousands of shares of a penny stock and then start the pump and dump scam. Pump and dump scams have increased with email, online newsletters and stock market chat rooms.

For example, you might get an email with a headline that says something like XYZZ is about to go up in price because of some great announcement or invention. This email will explain every reason why XYZZ will go up in price soon. And believe me, the writers of these pump and dump emails are great writers. They could sell ice to the Eskimos in January. Not all of the penny stock market newsletters are phony, in fact most are honest and have great penny stock information.

Pump and dump happens when one or more people own a lot of shares in a penny stock and are trying to pump it up or manipulate the share price higher with fraudulent claims. When enough people start to read these hot penny stock tips, some will actually buy the stock. As more people buy the stock, the price will move up. As the price continues to move up on the false claims, those who started the false pump and dump scam will then start to sell their shares into these higher prices while continuing to hype the penny stock higher.

They will usually not sell all of their stock at once; because that can cause the stock price to drop too rapidly and those who started the pump and dump scam might not be able to get out fast enough. So their selling is done slowly, slow enough that no one will notice the selling. When those in the pump and dump scam finally do sell all of their shares at higher prices, there will be no one left to buy your shares and the stock price will fall back down dramatically. Those who fell for this pump and dump scam will be left holding all of their shares at much lower prices.

 If there is enough volume or buyers of this hot penny stock, those who did start the pump and dump scam could sell all of their stock at once, causing a large and rapid drop in the stock, leaving others holding the stock at a very low price with no buyers to sell it to.

Where Pump and Dump Scams Occur

• Email, newsletters or hot tips. Usually these emails are spam pumping up a penny stock. If you notice you are getting a lot of these about the same stock all of a sudden, that could be a good sign it is a pump and dump scam.
• Stock market chat rooms are popular ways for someone trying to pump and dump a stock. They will get into chat rooms for penny stocks and put false information out there about financials, outlooks, contracts and even rumors that sound honest.
• Telephone cold calling. You could get a call on the telephone from some stock broker telling you of a wonderful opportunity to buy this hot stock. You are one of the few who this broker is giving this chance to and you can’t afford to pass it up. Never buy a stock over the phone, unless you know the broker personally.
• The wrong number scam is when you get a message on your phone that was “mistakenly” left for someone else about a hot penny stock tip.
• False press releases also happen. A press release about some company that either contains exaggerations or outright lies about a company’s prospects.
• Off-shore scam is becoming more common. Sometimes these stocks are called Reg S stocks. A rule known as Regulation S states that a company does not have to register a stock they are going to sell outside the United States. The company will then sell to phony off-shore investors who then sell it to US investors at highly inflated prices.
• Another variation of the Reg S scam is when a company calls you offering to buy any REG S stock shares you might own for a huge price. Only deal with brokerage firms you know and trust.

Research All Penny Stocks

Pump and Dump does not happen with larger companies because there is so much known information about larger companies. Beware of anything you read in chat rooms or email newsletters, unless you know of the penny stock newsletter. If you are interested in a penny stock company, research the company thoroughly before you invest your money. Call the company and talk with directors, the CEO or president of the company and learn all about them before you invest.

Copyright © February 2012 Sam Montana