How to the “Pump & Dump” Scams

Following on from our tips on avoiding the online scam of phishing of your personal financial details online, we’re now presenting information on an alternative kind of online scam which is gaining popularity at the moment.

Known as “Pump & Dump E-mails”, these e-mails purport to be providing you with confidential insider information regarding a particular stock. The tone of the mails normally take the form of telling you how the company has underperformed until now, but that it will explode in the coming days, allowing you to make a killing on the share price.

In reality, these e-mails may be coming from insiders or paid promoters who stand to gain by selling their shares after the stock price is pumped up by gullible investors – that is, you! Once these fraudsters sell their shares and stop hyping the stock, the price typically falls and investors lose their money. Fraudsters frequently use this ploy with small, thinly-traded companies because it’s easier to manipulate a stock when there’s little or no information available about the company.

Here are a few things to note to protect you from this kind of online scam.

If it’s too good to be true, it normally is – Rule number one of watching out for all kinds of scams, either online or anywhere else. If you have even the slightest inkling that something sounds too good to be true, then it probably is.

Consider the Source – When you see an offer on an unsolicited e-mail, assume it is a scam, until you can prove through your own research that it is legitimate. Have you ever heard of the person sending you the e-mail? Why would they be sending you such an e-mail? Even if they managed to pretend to be coming from a legitimate source, think how they would have gotten your e-mail? Whenever someone you don’t know offers you a hot stock tip, ask yourself: Why me? Why is this stranger giving me this tip? How might he or she benefit if I trade?

Independently Verify Claims – It’s easy for a company or its promoters to make grandiose claims about new product developments, lucrative contracts, or the company’s financial health. But before you invest, make sure you’ve independently verified those claims.

Search the Internet – A very easy way to confirm that the e-mail you’ve just received is a scam is to search the internet for the name of the company you’re being pitched, or search for the name of the person sending you the e-mail itself. It is quite likely that others will have also identified this as a scam and will be warning others online.

Take note of the characteristics of the stocks – Usually this is a slimly traded stock on a small exchange for only pennies a share. You’re unlikely to have ever heard of the company before, and normally the company will be described as about to make the big time almost immediately, and you’ll be told there are huge profits to be made. And at pennies a share it seems so easy to make money! Not so.

Find Out Where the Stock Trades – Many of the smallest and most thinly traded stocks cannot meet the listing requirements of the Nasdaq Stock Market or a national exchange, such as the New York Stock Exchange. Instead they trade in the “over-the-counter” market and are quoted on OTC systems, such as the OTC Bulletin Board or the Pink Sheets. Stocks that trade in the OTC market are generally among the most risky and most susceptible to manipulation.

Watch Out for High-Pressure Pitches – Beware of promoters who pressure you to buy before you have a chance to think about and fully investigate the so-called “opportunity.” Don’t fall for the line that you’ll lose out on a “once-in-a-lifetime” chance to make big money if you don’t act quickly.

Don’t be rushed – Like phishing e-mails, Pump & Dump scammers love to create a sense of urgency to try to get people to act based on their initial desire to make money, rather than allowing them take time to think things through. Their aim is to pressure as many people as possible into reacting quickly and purchasing the share, and because the more people buying a share, the quicker it will increase in price. But it can go down as quickly as it went up, and most likely will.

Be wary of the impact of the actions of others – If you do go ahead and actually research the share you’ve been recommended, and you see that trading volumes have possibly increased, and quite possibly the share price as well, remember that this e-mail will have gone to possibly millions of others around the world. Not everyone will be as wary as you about such e-mails and may well have fallen for the scam, thereby falling into the trap of the scammers.

And finally, if in doubt, do nothing!

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