Stock Market Investors » Stock Market Investing Advices and Tips » How to Avoid Pump and Dump Scams

How to Avoid Pump and Dump Scams

If you have experienced the flooding of your mail box with offers and recommendations for the purchase of a particular stock that promises huge returns, be very cautious because you may fall in the common scam that is referred to as "pump and dump".

How Pump and Dump Stock Scam Works

Under this scam crooks purchase large number of a company stocks that are extremely cheap. They do it in such a way that no attention is attracted to their purchase.

After this the crooks embark on a vast campaign of pumping up the price of the stocks by telling stories of how the price will raise leading to high returns. Additionally, it presents the stocks as an opportunity to become an owner of very profitable business. The crooks predict the potentially high returns happening within the next few days.

The crooks encourage their victims to purchase the stocks until the price is low and thus take advantage of the eventual high profits. If they are persuasive enough and manage to attract people to the particular stocks, the prices of the latter will start to rise. This will be used by the crooks to support their predictions and further pump up the price by attracting more people.

Such scams as false press releases and analysts commentaries may be used to further increase the price and gain credibility.

After the price reaches a particular point the crooks sell their stocks making huge profits. This is also the time when company officials have expressed their concerns about the rising prices of their stocks.

As a result of the sold by the crooks stocks, the price starts to fall, which leads to the selling by the other shareholders. Eventually, the shareholders are burned by the scam and the company receives sometimes undeserved bad reputation.

How to Avoid Pump and Dump Scams

In order to avoid falling into such a scam, consider the person, who recommends you the purchase of particular stocks. If you don't know him/her or s/he doesn't possess the required credentials you'd better not purchase the stocks. Additionally, beware when you are offered quick and huge profits. They rarely turn out to be huge if profits at all. Finally, new products, big announcements and etc. may also be a sign of the next scam that you may fall into.

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