Pump and Dump stock scams are still around. Here’s how to spot the stock tips that emerge from these, and how to protect yourself:
Worthless stock. Tight float. Thinly traded. These are the basic prerequisites of the “Pump and Dump” stock scam. And, con men, who realize that the most powerful force in the universe is gossip, respond accordingly, to spread the word of these “opportunities.”
First, a microcap company–one with capitalization so small that it is not required to comply with the normally rigid requirements of a stock exchange–is sought by the con men. Those found among the OTC “Pink Sheets” are some examples.
Next, tight float is sought. It’s a must. This surfaces in stocks being held by the insiders and promoters of it, in general, rather than the buying public. This, then, spells out into the third leg of the three fundamental requirements, thin trading, which, in turn, creates the best setting for manipulation. This results in the Pump and Dump artist’s being better able to control the price.
Say you’ve gotten into email exchanges with such a charlatan resulting from an internet chat room conversation. You are now set up for the Pump. Let’s borrow from the old comic strip, Dick Tracy, and call the scam artist involved, Tess Trueheart. Tess plugs the meteoric rise of Moonbeam Techtronics–from ten cents a share to eighty cents in just two weeks. Wow! you think. You tell yourself the “big kill” is here. “Now. Right in front of my nose.” You buy 5,000 shares, and feel like you are cornering the market, because the stock is thinly traded (as wild as this sounds, this reason is often, cynically, passed off to you as an “advantage”).
You hold. Not for long. Just one month later you find the bottom has fallen out of the stock. It’s now down to two cents a share. Now, when you find that Tess has suddenly disappeared, like a cockroach under a harsh light, the shock is like getting stood up at the alter.
You study. You learn. You now find that a simple procedure was followed, at your expense. The Pumpers were buying heavily–twenty cents, thirty cents, forty cents, on up the price ladder. Since the stock, sans public participation, was so thinly traded it didn’t take long to drive the price up to the eighty cents level where you bought in. Then came the Dump: the unloading of the Pump and Dumpsters’ entire holdings. Outcome? You, the innocent investor (sucker), get yet another empty bag to hold.
Yes, penny stocks are alive and well. And, suckerhood seems to be–forever–an embedded “way of life” in a corner of our investment community. Does the world’s foundation of ignorance ever fade to one of studied, rational thought? one might ask. Seemingly, no.
The best defense appears to remain, as always: study up, learn all the tricks, fortify your resistance against con men. Then use all the weapons available to you. Many. Seek. Then:
Fire back. When in doubt, follow the instructions actually printed on a U.S. Rocket Launcher: “Aim toward the enemy.” This, so as to best withstand the never-ending onslaught of the con men who, even through these old-fashioned means–the old Pump and Dump “beat” which goes ever on–would rob you of your innate instincts for value judgments. And, even more rudimentary, your “base” common sense.
If you lose $100 on a horse race, don’t lose another $100 on the instant replay. Why is it so many investors ignore this basic lesson?