Avoiding Stock Market Fraud and Scams

The stock market is not deprived of its crooks, waiting to defraud you when you least expect. The wide use and availability of the Internet has facilitated their work.

The sophistication and professionalism of the crooks varies a lot. Some of them have reached such a level of complexity that it may be difficult even for the experienced financial professionals to recognize the fraud behind the air of legitimacy with which the scams are usually covered.

Indicators for Scams

It is not possible to make a classification of all the scams, because tomorrow a new one may be invented. Some of the signs you may look for to see whether you are not becoming a victim of a stock market fraud are:

• A stranger offers you a deal allocated only for insiders.
• A system that guarantees that you will become rich. Ask yourself why the person doesn't keep it for himself/herself but wants to make you rich?
• You are offered a complex scheme that involves such things as offshore accounts, gemstones or oil leases in exotic places. The more complicated the scheme is, the less your understanding will be, so the higher your chances of being deceived are.

The Pump and Dump Scam

This represents one of the most popular scams. A group of crooks purchase the stocks of little known company that has some technology oriented name. After this they start spreading rumors about the high potentials of the company due to a major innovation that has been developed by the company. These rumors are usually spread over the Internet in order to reach a larger pool of potential victims.

The company itself is also a victim in the whole scheme since it usually doesn't know anything about the scheme in which it was involved. There have been cases in which the scheme was organized by company insiders. The crooks may apply such tactics as sending false press releases.

If the crooks are persuasive enough the price of the stock will rise. The crooks wait until they decide that the point at which it is time to sell the stock has come. As a result of their selling, the price of the stock falls and the people lose money.

There are many variations of the pump and dump scam so be careful when attempting to make investments in little known companies that have been recommended by brokers that lack the credentials and reputation.

So, the next time you are offered a highly profitable deal which will return your money over a short period, lift your guard. This may be next scam that searches for its greedy victims.

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For knowledge we can highly recommend you subscribe to the The Wall Street Journal.

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