Penny stocks are an amazing way to way to make money very quickly. They are also a method to lose all your money very quickly. This is why you need to know how to identify winners through a number of factors, such as stock float and liquidity. However, there are a number of scams you have to avoid when trading penny stocks and on such scam is pump and dump schemes. These are a very common scam and with the evolution of the internet, they are worse than ever. If you’re interested to know what a pump and dump scheme is and why you need to avoid them as much as possible, we recommend you continue to read this article.
What is Pump and Dump?
A pump and dump scheme is something that is performed all the time and is a way to manipulate the supply and demand of this particular stock. In most cases, it will be involved with penny stocks as they are low-liquidity. This means that they are heavily affected by share price fluctuations and can be manipulated if enough money is invested into the market.
A pump and dump scheme involves pumping up a penny stock through promotion and PR. An individual (or group) will promote a penny stock as if it about to explode in price and will tell customers to invest their money. As a result, the stock price will increase. When the price has increased enough, the individuals who are running the scheme will dump all the shares and will make a huge profit from the rise in price. As a result, any individuals who have invested in the stock will lose all their money.
Pump and dump schemes only benefit the people in control and will result in a number of losses for the people who were sucked in.
Illegal Practices
You may have heard of such schemes thanks to the movies that have been made because of early pump and dump practices. Movies like “The Wolf of Wall Street” are an excellent example of this, where a large office will cold call individuals telling them to invest in the stock. The company will incentive brokers will amazing commissions and get them to sell as hard as they can. This resulted in huge profit and left customers at a loss. These sort of companies eventually got shut down as they were essentially scamming everyone they sold too.
Avoiding Scams
There are still scams going on but they fly under the radar of the SEC as they are no longer performed on a massive scale. You need to know the signs of a pump and dump scheme and you need to avoid them as much as possible. With the advancements of the internet and social media, pump and dump schemes can be hidden in hype and promise.
When it comes to pumping up the stock, you will often see large promises and hype, specifically in press releases. One way to avoid scams is to identify if the writer is incentivized with money and shares. This can be found in a disclosure at the bottom of the article. In addition, offshore brokers are will-known for these kind of schemes, so avoid them is your best bet.
Conclusion
Pump and dump schemes are dangerous and can draw you in with promises and hype. They are often organized and designed to benefit the individuals in charge and can result in enormous losses. They used to be practiced in a mass scale but they were shut down by the authorities. You need to avoid pump and dump schemes as much as possible and need to recognize when a stock is being exaggerated.
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